What Are Alternative Investments

Hosted by OpenAlt, Chris Carsley - CFA, CAIA, Chief Investment Officer & Managing Partner at Kirkland Capital Group discusses What are Alternative Investments.

Wow, what a great introduction to alternative investments! Great insights into alternatives were discussed and covered. Below are some of them.

• The type of alternatives that exist,

• How to invest,

• Counterparties involved in the process, and

• Why investors are adding them to their portfolio

Watch the discussion

Intro to Alternative Investments

Transcript

Rachel: All right. Good morning, everyone. Thank you so much for joining us here today or good afternoon, wherever you guys are. I'm logging in from my name is Rachel Stolrow. I have a background in the retirement industry based around alternative investments. I've helped hundreds of professional investors onboard the investment process and start the investment process with self-directed IRAs.

And so I wanted to introduce as well, our co-host for today, Chris Carsley.

Chris: Hi everybody. Thanks for joining us. Good background on myself. I started my career off in traditional investments. I managed the money for a number of different high net worth and a small family offices for a number of years.

And then my career transitioned into alternative investments where I was fortunate enough to join a hedge fund and work as an arbitrage trader and one of their groups for a number of years. And then I've also worked at fund to funds. Built in, worked at a seed angel investment company.

So I've managed to touch a little bit of everything in my latest venture is actually within a private debt and real estate. So I'm working in operating a fund in private debt and working with a number of people on real estate syndications as well. And then also I've had the opportunity to work internationally and building a few companies and startups in Australia and Singapore.

So a little bit of everything on the alternative side. So hopefully we can cover a number of different subjects. We're not going to dive deep into any of these particular nuances. I know that we've got some more exciting seminars coming up or webinars coming up where we're going to dive a little bit deeper into the aspects of alternatives.

But at any time I'm very open. If you've got questions midstream, please, write it into the chat function raise your hand, wherever, whatever works. But without further ado, let's let's jump in and talk about some alternate investments. Alrighty. So quick agenda here. What are alternate investments?

They've been around. Many years. But it's a relatively new field for a lot of people. And new people who are now actually maybe accredited. And it's something that you haven't had exposure to. So we'll walk a little bit about what they are. And then we'll walk in dive types of alternatives exist.

Cause there's a lot, there's a lot of different alternative investment platforms out there. And then, who can invest in these? There are some rules and regulations in place that have provided historically limits to who can actually invest in these and some of those walls are coming down.

And there's some, material changes. And we'll talk a little bit about that. And then, one thing I always love about you get in these seminars and people talk about all this fancy, cool stuff that you can not that's available for you. And then they don't bother to tell you what are some of my, how do I actually even invest in these?

And one of the things I always like is why add. It's the big question is, art alternatives, for me. And why should I add them to my portfolio? So we'll walk through a little bit of that, but let's dive in and start with the next slide of what is an alternative investment. I don't like to read slides, but this is a pretty good definition of what it is.

Alternative assets typically refer to investments that fall outside of the traditional assets classes, commonly assessed by most investors, such as stocks, bonds, or cash investments. Now we used a, we used a, another word in that definition is what is a traditional investment? Traditional investment is what most of us know and have historically probably been involved in for a long time is I'm going to go long, a stock or a bond within say a brokerage house.

You'd call up, historically, and your broker buys, apple or Amazon or Microsoft, whatever you want to buy. And and that, that was that simple aspect. And that's actually what most people live in invested in. Some of you may have heard of like the 60, 40 portfolio of, Hey, I'm 60% equity, 40% debt.

And those are just long positions. There's nothing really esoteric or different about it. And, it's performed by the masses. There's a joke in alternative investments is it's easier for me to tell you what they're not than it is for me to explain what they are. And with that, let's dive into that next slide.

Because this is that initial first step into what is an alternative investment. So what types exist out there? And there is a ton so anything that's outside of a traditional long stock or equity or long debt or bond you have now ventured into the alternative. And there's even arguments that, REITS might be deemed as an alternative, even though you can go buy them like a stock.

And they have a lot of aspects that function like a stock, they still are investing in a variety of different real estate and real estate itself. Falls under that first category. We see there's real assets. This is a private investment in say, you're going to go buy some land or one of the big things we've seen over the last decade is excuse me investment directly into functioning farmland.

I'm out here in Seattle. We have a ton of people on the west side of the mountains that are extremely interested in farmland and apples and everything else that's on the east side. So there's been a lot of single-family offices that have gone out and taken positions directly into farmland and the functionality and the growth of that farmland as.

We are now in a global environment. We are now shipping these this product all over the world. We joke here that even in Washington, even though the apples are grown right over the mountain, we actually get the second rate apples, all the first-rate apples, go to other people who pay much higher prices.

So I'm not sure about that. Then you've got timber. Another big aspect uh, in a lot of countries is direct access to land for timber and working in contracts to go out and, work with a large corporation. That's going to come in. Harvest that timber replant, and maintain the system sustainability of the land.

Something that people might be a little bit more familiar with commodities, I'm going to go buy, gold or orange juice, or for those people who've seen the movie trading places. Maybe we're going to go invest in, pork bellies. Most of that's done through a very particular market called the futures market.

It's not something that's terribly easy to get direct exposure to, commodities unless you're going to trade in something called futures. We're not going to dive into that today. That's a little, that's a little deep for this level of conversation. And then. Some of you may be already own real estate.

You own your own house. You're technically a real estate investor. Maybe some of you have a single family residential place that you use as a income. You rent it out. The next step up from that is, you're now owning commercial level properties. Maybe you own a small apartment complex or maybe you own a strip mall that would be considered, retail or perhaps you own what some people call mixed use where maybe you've probably all seen these common buildings where you have office space or retail space on the bottom floor with apartments.

There's lots of different forms of real estate, lots of ways to participate, directly in real estate. Me particularly, like I'd said earlier, I run a debt fund and I do direct multi-family. Even myself personally, I'm, I, I'm involving myself in the debt aspect of real estate which gets more on the private debt side.

But you're also, direct ownership of, functioning property infrastructure for people who are not aware of this could be in relation to the development of roads, bridges, and a variety of other key aspects that build the infrastructure and the logistics within our country or some other country.

You're usually involving yourself in governments and dealing with a lot of regulatory aspects with regards to infrastructure. So there is an extra level of complexity. It's not simply like you just go out and buy a bridge and charges, pool structured products. These are derivatives.

There's more people on wall street applying a lot of math to come up with a variety of products that will have payouts similar to another asset, or create a unique risk structure. These get pretty complicated to give you an idea in 2008, and this is the product mix that kind of caused all the problems.

So you're collateralized mortgage obligations and, the invention of CDS, which is the credit Default swaps. Those were instruments used by a lot of people trying to hedge against the risk of what wall street was doing. And so those are not for the meek. If you're really interested in that kind of.

No. Do your research before you start diving into that cause you're going to be playing in some deep waters on your structured product stuff. Many of you probably seen let's just skip other go onto the more common one hedge funds. There are tons of different types of hedge funds. I listed a few here that are probably more common, probably the most common is your long, short or long short equity.

And really all that is people diving in and taking, a position of, Hey, I'm going to be long equity. I'm going to be short an equity. And then we lost our our deck is moving away from us, but that's okay. I can talk about a number of these different aspects regardless of that.

That's a very common structure is where you'll find a hedge fund. That invests specifically in, long, short equities. There's a lot of them out there. And there again, I, like I said, we got some really interesting conversations coming up where hopefully in the due diligence sections and the diversification sections of the conversations that come after this, we'll dive a little bit into some of the nuances of how to think about these various structures but managed futures.

That's a commodity play where people will take a bet on either a, an index and equity index, like the S and P 500, or they'll make a bet on some kind of currency or they'll go in and say, Hey, I'm going to, I trade futures in gold. And so you can find hedge funds that will do some of that commodity trading through managed futures for you.

So it's if you're not comfortable doing something yourself in alternatives and find a professional, and that's where, this bucket of hedge funds comes in there's lots of different structures. There's lots of people doing very interesting things. It's just a matter of does it fit in your portfolio?

The other big one that most people are aware of is your private equity. In private equity that encompasses a lot. I know everyone says private equity is the definition of of the entire universe of investments, but it's also a class within itself of where you have a lot of people doing, angel investing, which is people who come in and work with startups and write some of those initial checks on those seed level checks that friends and family around to help someone build up a startup company.

That's become very popular over the last couple of decades. The next step from that is you'll get different venture funds. Now, venture funds come in different flavors. Some will invest early on. Some will invest in a variety of different steps of a company's growth in in, in history. And then you'll have venture funds that are more later stage they're in that stage of where.

You've already got a product. You've got to, everything moving, maybe you're in revenue and they're going to take you to that next step before some large private equity firm buys you out. And there's lots of different areas. And I guess one of the key aspects I want to say is each one of these bubbles has lots of moving pieces and a lots of individual ways to invest in and different risks.

If you're going to be like, let's use venture as an example, if you're going to be investing day one in angel and seed you're probably taking more risks than that later stage. Now you'll hopefully obtain a greater return for that risk you're taking. It may take a longer duration.

Things are a little bit more liquid. It may take more time than someone who comes in, a year or two years, down the road from maybe that company goes public. So all things to think about with that section and then the other. I threw two sections in here. A one was liquid alts.

This was something that came out many years ago where people wanted access to returns and risk characteristics, similar to their illiquid cousins, whether that'd be hedge funds or structured products, but they wanted liquidity for it. And so here again, you have very smart people deploying a number of different math and legal contracts to create platforms that will give you a payout profile and risk characteristics similar to their more illiquid cousins.

So you might, for an example, there, you might have a long-short hedge fund that has a year lockup. There might be a liquid alt that exists and what it can do is take a similar set of risks to obtain a certain the same kind of return, but it's got great liquidity sometimes down to, where you can get daily.

That's one option to think about. Don't be surprised historically liquid alts have underperformed their illiquid cousins, but that's not to say, adding them to a portfolio is still valuable because they do ask, they do take on a different risk profile. They act countercyclical to some other things that some people don't in their portfolio.

And then everyone's new favorite on the block. Crypto, lots of ways to play this. You can go direct, go open your own coin, basic counter, whatever, and you can invest directly in Bitcoin, Ethereum, a variety of different other stuff, tokens. And, or you can go in and find, say, okay, wait, I want to go to a fund.

There's lots and lots of crypto funds that have been created over the last couple of years. And they're doing a variety of different structures, taking what they call market neutral, where they're trying to take a long and a short structure now we're back to that long, short structure in crypto.

There's some that are capturing yield through, Defi. I'm not going to dive into that here. That's a whole nother seminar. And then, or like I said, you just choose to go to direct. You're like, oh, I just want to own some. And I believe in it, maybe you're, a big, one's a great store of value and I just want to own it for the long.

That could be one of your decisions. So the key to this slide is there's a lot of options in the alternative space. You gotta find what is that you want to put in. And what do you want to actually add to your portfolio with regards to alternative investments? And there's some other slides we'll dive into a little bit more of that thought process of, why here in a second, but let's let's jump forward and go into, who can invest in these things.

Like I said, there's lots of rules and regulations of where people have put. The law in place to, for protections for investors. I know a lot of people complain about, all the only the rich get to invest in these. But you have to understand these laws and these things were put in place because there was a great deal of fraud.

And there was a lot of people who did not have the liquidity or the money capability to afford a total loss of capital, and they put themselves in a bad position. And so this was done for a variety of different reasons. Therefore there again for investor protections now these laws haven't changed very much over the years, so we are starting to see some changes as our world has dynamically changed, where you have much more broad wealth in a growing middle class, you have greater education levels and information sharing.

So there has been some changes, but The two core categories, there are some in the middle but the key one that most people here hopefully listening to this will be you're an accredited investor. And what it means to be an accredited investor, if you're going to invest in one of these alternative investment platforms as an individual, the general rule is you have to have a certain level of accurate, gross income.

That level right now is 200,000 for an individual and 300,000. As say a married couple of filing joint, you have to have that for at least two years. So generally if you invest in one of these funds the process, they will ask for an accredited verification process and you'll have to show proof whether that be tax returns or an asset statement.

Showing I either make 200,000 or 300,000 joint. The other aspect is a net worth, exceeding a million dollars that excludes your primary residence. So there's two factors, your income or your net assets, and you can show proof either one of those as proof to the fund or the investment operator that you are an accredited investor and that you have that wealth and that knowledge level to participate in this investment.

According to the rules of the laws if you're an entity you usually need to have 5 million in total assets to to be an entity that's considered accredited. So if I go out and create an investment company, that's going to invest in other alternatives, I'm going to have proof that I have, 5 million investible assets within that entity.

There are some other aspects that have just come around to dive a little bit deeper. If you haven't to work for a fund that you worked for hedge fund, you actually can participate in that investment as a related party member. You're part of the investment company. You're considered a knowledgeable employee.

That's another way to potentially access these alternative investments. And the newest one that was just added was education. There was a reason we were willing to put together that your professional knowledge, your designations you can actually, maybe you're a registered investment advisor and you have all your licenses in place.

You are now applicable to invest in alternative investments due to your knowledge base, not necessarily just how much money you have. So that's one of the newest ads for accredited investors qualified purchasers that's a higher class. Individually you gotta have 5 million in investible assets and have proof of that.

A family entity also needs 5 million. So you, maybe you have an entity that was created, but it's all family members within the entity that still has to have 5 million. If you create a trust there again also needs 5 million. And for an entity to be a qualified purchaser, it has to have 25 million in investible assets that people might ask.

What's the real difference. W why accredited versus qualified? Most alternatives are open to, accredited investors and above. But there are some platforms that are only open to qualified purchasers. And so you just want to have access to those investments and that investment opportunity, if you don't meet that classification, that's one of the biggest differences is just whatever the fund is requiring as a minimum of investment.

Do we, any questions covering a lot here? But if there's no questions I don't see anything in the chat, so that's great. So that's, who can invest in these let's go a little one step further of like you've determined. I am a person who can invest in these. How do I invest in alternative investments?

A lot of different ways. Someone's particular on the type of investment you're going to be going into. You can have a direct purchase. That might be like my earlier example of where you're going to directly invest in. Crypto, it's going to go out and buy token. Another way is I'm going to directly invest in say a real estate syndication.

I'm going to become a limited partner directly into that opportunity. Or you may take it one step further. I'm going to go buy my property, myself, owned and operated private funds. That is probably the most common way that most people are accessing alternate investments because you are finding an expert..

Who runs an investment platform or a fund that is doing something that you want to have exposure to. And whether that is a hedge fund venture fund, a private equity fund real estate investment fund there are a plethora of them out there and and I'm not gonna lie to you. Sometimes it can be difficult to find access to and information on, who all is out there and who you'd want to spend time with talk to you because you could spend your entire life just trying to locate the long, short hedge funds.

I think the last count that may be a little dated on this, but the last count there was like 9,000 long short equity, hedge funds in existence. That's a lot when I was actually working for a fund to fund it, my job was to tear apart hedge funds for potential investment. You'd see a couple of hundred a year and dive in pretty heavily on those.

So you can understand that. 9,000 is a very large number. And you just got to find a way within your network and aspect of, how you're going to source those fund to funds. Maybe you don't have the time or the capability or knowledge of doing proper due diligence. You're going to hire experts that actually will go out and do the due diligence on private funds.

And they put together a portfolio of diversified opportunities in the alternative space and you invest in them. So there's a lot of value in that. And sometimes fund to funds will have access to funds that you can't, get access to normally regardless of your wealth. There's a lot of funds that are just closed and they don't care if you're worth hundreds of millions or not.

You're just not getting it. Fund to funds the drawback to that is. You're paying fees at the private fund level, and you're paying fees at the fund to fund level for them to go out that find, manage that portfolio or give you access to something you can't get. So they are adding value. But you do need to monitor and understand what are the total costs involved from beginning to end given the broader variety of tiers.

And then more recently crowdfunding I think, really started in the venture and angel space where a lot of people were jumping on the web and looking at startups and you had angel list and you had all these people coming forward and that has just ballooned. To the point where now you're seeing that not only for startups, you're seeing that in a variety of different real estate products, and you're seeing it in venture you're seeing a lot of different opportunities.

They have entire new issues. We're not going to dive into this, but the issue the ability to raise money through a REG A+ plus where you can actually go file and aggregate non-accredited investors into private funds and things that normally were only accessible through being an accredited investor show.

Now you can go to these platforms through Reg A+ plus, or, reg CF is the other one stands for regulation, crowd fund for smaller dollar amounts. There's lots of platforms, lots of very talented people doing things on that front. And I don't think we've seen the end of. What's possible for those platforms.

So that's another avenue for you to potentially access alternative investments. But one thing you'll see over here, there's a side note on this slide. If you're going to get into these, regardless of maybe some, not some of the direct purchase stuff, because of I'm going to go my own property. I don't have, I don't have a fund document, but a lot of the private funds, the fund of funds, and even some of the access stuff that you get through crowdfunding, if you're going through into a funder direct investment, they'll have a series of documents called the private placement memorandum.

That is a very comprehensive document that we'll walk through and describe the investment in ad nauseum, hopefully, and really cover every detail. These structures, liquidities of what's in the nature of that investment. It'll describe what they do, what their objective is, who the manager is. It's very important that you read through this document guide, literally call it like reading the rules of monopoly.

It's hard to play monopoly effectively if you don't know the rules, that PPM is that starting document of understanding what is happening and how does it all work. For that alternative investment, the next one is the operating agreement. That's the operating agreement of you as an LP investing in and another LP or LLC structure, whatever the investment is structured as that's also a very important document because there'll be further descriptions of various operations defaults, everything else that we'll go through.

Those two combined are that complete package of understanding of what you're investing in alternate investment. I'm not going to lie to you. They're super dry. They're written by lawyers. If you've ever, I spent most of my career reading these documents, so I've gotten very good at going through a lot of them and understanding legalize.

But one of the things you might have to find is a lawyer or a third-party company that does due diligence that can understand and help you understand those documents, if you're new to those, but it is important to read. Don't be shy about it if you read through it and you don't understand something, get back on the phone with the manager of the private fund and say, listen, you got to explain to me, what is this?

We try to obtain as much transparency as possible and alternatives. It's very important to do that. And if you feel uneasy about anything don't invest until you're like, Hey, I get it. I understand. And I feel comfortable. And then lastly is your sub doc. That's a signed document that we'll walk through, who you are at Alaska credit verification questions.

And then that's actually the legal document. There's a proof of ownership within the private investment. So pretty important document to make sure you get properly filled out and signed and then, maintain a copy of that because that is your proof of ownership. And then let's jump into next okay.

We talked some about this kind of parties involved in this process. This is not as simple mean investing in alternate investments is not as simple as just saying, Hey, I'm going to log into my account and just type in a stock symbol. We'll buy a hundred shares, that some limit or want to pay market if that's what you really want to do.

It's just not, there's a lot more moving pieces. It doesn't mean it's not possible. It's just going to take a little bit more effort and there's a number of people within this industry to help you. Navigate that new adventure that you're choosing to go on. First is, okay you might have investment groups.

That's good to get into an investment regroup. That's particular to what you're trying to look at. It's one of these you might find other like investors who've already run into a wall. Maybe they've already done this, made mistakes learn from their mistakes. They probably, if there had been an investment group that has been around for a while, they might have a number of funds that they've had success with that you can dive in and start with something that other people have already found success with.

So they'll have potential deals and most of these provide a ton of education. I get invited to a number of these people that come in and talk about nuances. I know one that invited us recently just to come in and talk about, what is bridge findings? Got a bunch of guys that understand real estate, but they've never really dealt with why it's bridge financing important within the real estate space.

So we just gave it a discussion recently on that. Two, you might have a registered investment advisor or wealth manager, your again, hopefully they have an education level or access to people that can answer some of these next level of questions or will, Hey, maybe my traditional portfolio has done great over the last 10 years, but it's time for me to think a little bit out of the box, Mr.

Adviser where are your thoughts? What is your network? What can you give me access to, to help me educate or what are other investors within their network that they're making. What are they looking at and what are they doing? They're getting into their possible source of deals. There's a number of high-net-worth wealth managers.

I know that our various astute are smart with regards to alternatives and they've built a network of investments that they've had for decades. So find those people, if you don't already have one and, use them as that resource the one other advantage that they'll have over myself or other people, they understand the rest of your portfolio.

So it's very important if you're going to add some new investment to your portfolio. How does that affect the rest of your portfolio? Just Willy nilly, throwing random things into your investment portfolio might work out, but who knows you might be taking undue risks that you shouldn't be taking.

Given the other investments you have, so they'll have a, they'll have a leg up in understanding, what you might be looking for, and hopefully they could walk you down this path. Like I said earlier, a lot of documents, terrain that last person is, legal tax counsel. Perhaps you have a lawyer that is experienced in dealing with alternative investments and he can help you, or she can walk through the legal documents, the PPMS and the operating agreements, and really helping you make sure you're not tripping over something or missing something or about to make a bad decision.

And why you made that decision? I'm not always talking about fraud. A lot of people get hung up where the media just dramatizes fraud, frauds a lot less. It happens a lot less than the media would like you to think. Most people who are running investment funds in the alternative space, they are on the up and up Where the lawyer can come in and say Hey you're very tax-sensitive and your tax counsel can come in.

And this fund is going to generate a lot of tax for you. That might be that's. What I'm really getting at is that's the advantage of these pieces where people can come in from a different lens, from a different angle and understand and help you, identify something that's important to you that perhaps, someone like myself on the outside, just wouldn't see.

I mentioned earlier third-party due diligence providers. If you find yourself doing a lot of these and you don't have a team to do it, so some of this might be, a single family office, no small family office groups. You might actually outsource some of this function of due diligence to a third-party due diligence provider where they can go in and they can do those initial five, 10 steps of doing background checks and a variety of other things that you'll need to do.

When looking at alternative investments. And then obviously last but not least is your custodian. If you're going to be using qualified money a lot of people out there's trillions and trillions of dollars sitting around in IRA's IRA rollovers self-directed 401ks. There's tons of different vehicles being put together by a variety of different folks.

And custodians are extremely important as they are that place where that investment will be held and monitored. And they're there to make sure that valuations are recorded. That statements are correct. They're another pair of eyes on this alternate investment for you. And it's, it's the law, they're there to protect you and hold that alternative investment and make sure that the manager or is doing what they should be doing and providing information.

And you might have to integrate where the actual processes once you've lastly there's, Fund Administrators 2008 kind of created it's not the wall of 2008, created a a dynamic. That if you were going to raise money from investors, they were no longer allow self administration or an administrator that was owned by the parent company because there was too many conflicts of interest.

And so fund administrators had to be a third party. They act as a middle and back office function for a lot of investment funds, for us, I reconcile every single month with my fund administrator down to the penny. They actually calculate management fees. They, they calculate returns.

And so really what is, even though I'm doing all those calculations myself internally, they're acting as a checks and balances against me in the name of a, for my investors to ensure that there is a non-related third party, double-checking my math and making sure that what I'm reporting to investors is correct.

So you as an investor, That you want to go invest in a in a hedge fund or, debt fund, whichever any kind of private fund structure. At some point, you'll have some type of connection with a fund administrator. They might ask questions about AML, which is anti money laundering and KYC that know your client process.

They may ask for, give me your ID and your social security number, proof of address, because they need to make sure that, a wanted person on an OFAC list. They'll ask for accredited verification materials, they'll be, maybe they provide an investor portal for you to where you can go in and get access to documents and returns and see how your funds doing.

So you'll usually find yourself integrated with the fund administrator at one point or another. Hopefully the fund manager is also there to make sure you're receiving everything. So that's someone you'll probably integrate with and he didn't know any fund administrators or you go into alternate investments.

You're probably going to run into them at some point. Now in real estate, they don't always have external fundamentals trainers, but you'll have an administrative function would view a real estate syndication. Usually within that sponsor is a series of people who act as an internal administrator.

You know what happened in oh eight, didn't reach all the way into, real estate and how real estate structured. Yeah, I'm sure that day's coming. But so we'll see how that plays out. But those are the people that are going to help you walk through from the point of sourcing, doing due diligence, holding the asset, and then the ongoing monitoring and maintenance of that asset as you hold it.

Like I said it's, you don't get to see all of it. I think it's it's okay. The duck always looks calm on the top of the water, but he's paddling like hell underneath. And that's where all these people come in is you don't always integrate day to day with these people, but there's a lot of moving pieces underneath alternative investments that you as investor don't always see, but it should be aware of, who's in there and doing it because when something goes wrong, you want to make sure you got the right phone number to call and say, great, where did it all break down.

Moving onto the next slide Pretty important question. Now we've talked about what they are and how we can access them if I'm applicable to even invest in them. But why do I want to do this for years and years? All I did was, was just long in the market.

Everything worked out great. We are seeing some dynamic shifts in today's market. So that traditional investment portfolio is, maybe not performing the way you would like it to be. I think one of the things that, obviously the reasons why I made changes a couple of years ago and started at a debt fund was I had tons and tons of RIA is calling me and saying, how can I go get yield without going too far out on the risk curve?

So the growth of, a variety of different private debt, not just in real estate, but venture debt, consumer debt, tons of different angles to think about alternatives and fixed income. Knowing. That if we get into a rising interest rate environment, fixed income is going to suffer, which it has immensely this year.

It's been brutal if you owned traditional fixed income. If you, but the easiest way to break down, this is the section I have here is am I adding an alternative investment to my existing portfolio for return enhancement? Am I looking for something that can outperform what I currently own? That's one angle to say, okay, great.

Maybe equities are not going to put up 18% returns. They're going to put up six. Is there something else that's equity like that? Maybe I shaved some of my equity off and I look at a return enhancement. I can find something that's going to give me that nine or 10 or on an equity basis. EDD. You know what, I'm just giving you examples.

I'm gonna tell you to do this. I'm just saying this is some of the thought process you can go to of what would it mean and why would I add this for a return enhancement? The other one is portfolio risk mitigation. And there's risk and everything we do. If you think you are out there making money for free and not taking any risks, you are greatly mistaken in any way he tells you otherwise should probably find a new industry before they go to jail.

But there is risk in everything we do and we invest and you can find a lot of alternative investments that maybe don't act like your long stock portfolios. They have low correlation to it. And I know I just threw out a term that not everybody may totally understand, but understand that. How an investment, whether traditional or alternative reacts to certain things in the market like we just discussed Hey, if interest rates go up, what's going to happen to fixed income.

It's probably going down. You can Google that. They'll talk about the inverse relationship of interest rates and fixed income. Those are the things you can also think about as well. What investments can I have out there that might give a decent return? I'm not looking to enhance a return or maintain a certain return level, but I want to make sure that I can obtain some level of return and I can have something that is a risk mitigator to my existing portfolio.

So that's another thing to think about is finding investments. I'll give you an a little bit of example. I know this might be a little high level, so I apologize, but a lot of the things that we actually ran back in oh 6 0 7 and even in oh eight was. What they call counter-cyclical. So one of the things that we had were people that were naturally short, or you had somebody who was trading global macro.

So they were very liquid. They were moving with the trends of what was happening. And so these particular investment managers would find themselves usually having positive returns when everything was going down. And so we actually had a fair amount of those existing in our alternative investment portfolio at the fund to fund I was at.

And that acts as an offset. And often not for years, they didn't put up very great returns, but boy, when the market fell out from underneath them, they, their return profile they were putting up, high double-digit returns. And that was an offset to the rest of the portfolio that was, perhaps suffering because they were a little bit more long-biased and they were taking that hit because of the global financial crisis.

So that's something to think about with risk now, ID. And these aren't always easy to find, but they are out there. You can find alternatives depending on what you already own. You might find investments that well, they can act as a return enhancement over what you think your expected return is from your portfolio, but they also have a low correlation to your current investments.

If you find one of those that's something that's a very particular interest to you. You should continue the research and the education of that type of investment, because that could be a very good add to your portfolio. Not all of them were functioning that way, but depending on what you already own, they do exist in there, out there.

That's the wise, you would add these to your portfolios. They can actually be very dynamic and and there's a material reason. Everyone always asks me, why should I think about alternative investments? And I said you got to ask yourself all the big pensions, endowments and all the large institutional investors.

Usually they have large allocations to a variety of different alternatives. And you've got to ask the question if they're using it and I'm not, what am I missing? But you got to get in and get to really understand what you're looking at and you got to educate yourself. And don't just say, oh this large endowment does this and they run 70% alternatives.

I should go do that. Now remember you're an individual that has a lifespan and endowment is an immortal entity, a entity that has no end to it. So it's looking at the world different than perhaps you are. I've had a number of investors, they're in their eighties and they get pitched stuff that has, 12, 15 year terms to them and they just laugh.

They go, I may not be alive in 12 years to see this actually come to fruition. So it's not really an investment for them. So things to think about with, there's the why, and then, what fits you specifically, next and see, and she had, this is a very district, quiet group very educated group on, but someone in.

Really it's anyone who's been around me long enough, you'll hear me say this a million times, read you the documents. If you decide not to read your documents or understand what you're investing in going through an alternate investment it might not work out the way you think, and I'll give you a real example.

There was a little bit of a fear of missing out in oh six and oh seven. And a lot of investment professionals jumped into alternatives without really understanding what they were into. And oh, eight hit and in oh nine, I got some very interesting phone calls of where you had an investment manager, call me up and go what I invested in this hedge fund and they're not giving me my money back and they say, they're gated.

What does that mean? And I'm like, wow, you signed an agreement to invest in this. You obviously didn't read it or understand it. And you don't understand one of the key aspects of what a gate is were gate is the ability for a fund to basically hault. Liquidations out of their farm until they deem it's, prudent for investors to do and so people wanted their cash out, even if it was at the bottom. But it just, that fund had gated in the, they couldn't get liquidity. So they had to turn around and tell their investors that I can't give you your money because I'm locked up. So don't be that person, read your documents, understand what this fund, how the fund operates and what can happen in a variety of different scenarios.

The second one here is using some particular, language that I'll explain, but, determine what inefficiency is this opportunity or fund exploding. And what an inefficiency really means is they're making an excess return somehow. They are not earning, a risk-free rate or a cash-related return.

Okay. What risks are they taking? And given what risks they're taking, if they're making saying, oh everyone else is making an eight and this guy's making a 10. Okay, that 2% difference. What does it come from? What inefficiency or angle or edge do they have within that investment that allows them to make an excess return?

You should understand that you should understand that how they're doing this, the basics of why it works and what's the longevity of it. Are they going to be able to continue to outperform in a variety of different markets? If you've got a fund that's been around for awhile perhaps they've gone through some stress periods and you can talk about some of those stress periods and understand how they outperformed or underperformed in, in that period.

Yeah. Understanding the inefficiencies that they're taking advantage of, the fund that you're looking for as well, regardless of market, they're still outperforming a benchmark. Lastly is just a lot of people go out and buy a long stock. You don't have access to the CEO of the company.

You might buy you. Can't call him up and say, Hey, I'd love to talk to you. You've got an investor relations group. That's more marketing sometimes than not. But in a private investment, you do have access to some of the people that are actually running the day-to-day. Before you invest, understand who they are, what is their particular edge?

How are they going to as a team and as a company, exploit that inefficiency that we just talked about, to, so that they can consistently generate excess returns for you. That's very important. Do they have the operational capabilities? There's a whole nother dynamic, the alternative investments that you can't really just understand the investment.

You got to understand the team and the operations that carries out the investment. What has this manager built that, the safeties and the protocols in place, the process and procedures. To help protect your money as an investor. You're taking risks and you might lose money in the investment standpoint, but you don't want to lose money because, they don't have proper accounting or they, they didn't have proper operations or processes or procedures for, protection of information, a variety of different things that can go on.

Those that's that last factor of understanding that edge and what does this group of people have? It's gonna continue to work for you as their investor. So lots to think about, and I know you guys are going to dive into a lot of that in much more detail in the upcoming webinars.

So I look forward to those as well. So speaking of those upcoming. Y you should diversify. I think most people would understand the nature of diversification. There's some arguments that, you can go talk to buffet and a variety of other people about, concentration issues. But as I said, back to that point of where you're looking at, why invest either a return enhancement or you're looking for some type of risk mitigator or another name for a risk mitigator is you can diversify into a number of different things that don't act or function the same, or they take different risks.

So you're earning returns by taking different risks in your portfolio. So we'll talk a little bit about diversification. We also, I covered a little bit of due diligence, so we're going to have a webinar on the basics of due diligence. Like I said, in alternatives, know, it's got a twofold, you've got investment side and you've got operational due diligence as well.

One's more about obviously investment one's about the, the team and the manager. And then, next-level questions to ask you investment sponsors. In that webinar, we'll have someone come in and talk about actual, real questions. What should you dive into? What should you be asking if giving you some of the bullets for your gun to fire at some of these managers and get the right information that you need to understand.

So those are all gonna be great webinars coming up, and I hope you guys can join us for that as well.

We choose that we any questions I had I had one question, it came to me. What are my first steps in doing this? Okay, good question. Cause it can be daunting if you've never done this before. There's two ways to move forward and a lot of this is I'm not going to dive into procedural.

It's more about, what's in your head. I find for most people who are new to alternatives, identify something that you're excited about, that you have a passion for, you want to learn about it. Take that idea and identify whatever class of alternative it is. Maybe it's private equity.

Maybe it's something more hedge fund-related. Maybe it's real estate want, maybe it's crypto. Go in, get the information, build that network, chase that passion. I find that people who are passionate about something dive deeper and do better work because they have a desire to learn. Follow that, go after that, find that opportunity and then add that to your portfolio.

There's some, not every doctor, but a lot of doctors that I managed money for. They wanted to go do a one-off stuff. And I said you have a real passion for medicine and biotech. Why don't you go after that and, use your field knowledge and your passion to go better, understand, biotechnology, stocks and things like that.

That was an example that I gave, some of the people that I was managing money for back in the day. So that's one angle the far more professional angle and what I do for a living and what I've done for a living and most people do for a living is I have a portfolio, it is not performing.

And I need to find why it's broken or it's not meeting my required rate of return and identify that weakness. And then I understand it and go with identify how to fix that through a variety of different alternative platforms, and then simply deploy that as a lot less fun. But that's what the professionals do they dive in and take that angle.

But you as an individual, Find that passion, cause that's going to drive you to, looking all the dark corners and all, and ask all the right questions because not only are you doing the due diligence on a fine, you're simultaneously educating yourself by going through the process.

So that would be my answer to that question.

Rachel: And then it looks like we have a couple more one is why are most alternatives, illiquid?

Chris: Okay. That is a true statement. They are generally illiquid or here, again, read your documents so that you understand illiquid in what way? Sometimes there'll be lockups.

Sometimes they'll be in the documents you'll say, Hey, you have quarterly liquidity. Okay. Why on some of that is due to the nature of the investment. Some investments, let's use the really obvious ones real estate direct equity in real estate and, venture. I don't know if anybody on here has ever been, started a company up.

It takes a while. It's not I start a company six months later, Google buys me and I'm out and I IPO, it just doesn't happen like that. It has happened that way, but for the 9 million other people in startups it doesn't happen. It can take time. There's a reason why venture companies will have seven to 12-year type of terms for their funds because to create amble liquidity and to close out that entire fund of all the companies they've invested in can take a long time to maximize value for a functioning entity can take a decade or more.

And that illiquidity is due to the nature of the investment. Now there is something called an illiquidity premium. You might hear that floating out there in the alternative world. What that really talking about is you're being paid an excess return for locking your money up for a time. I think more importantly, the way to look at that is to say great.

What's the nature of the investment. If I'm going to go into a real estate syndication and I got a value at play on some multi-family. I'm not gonna be able to do that in one year flat. It may take three, five years, maybe a little bit longer, depending on the nature of the property and how much he needed to be fixed.

And then you got time to raise rents and pre-in increase the NOI of that property that all takes time. So understand the nature of what you're investing in and understand that illiquidity might be due to the nature of the fund and the underlying investments or the direct project that you're involved in.

But regardless you should be looking at a situation away. If I'm gonna lock my money up, what is my excess return? How has that, am I actually receiving something? If someone said, Hey, I'll lock your money up for five years and I'll give you a 10 year treasury return.

My question, that one it does happen out there. It doesn't mean the investment's going to work out just because it's liquid, but so that's yeah, that's, that's what I answered that is, why are the eliquid is just in the nature of a lot of alternatives.

They take time to come to fruition. Now, the other side of that is if you're going to go into a long, short equity hedge fund there might be a kind of a lockup period just to make sure investors are not jumping in and out of a fund, but most of your long-short equity hedge, we don't have like quarterly redemptions.

You're seeing some that are coming off of that. But most of the ones that I've known, and you got to understand they're just going along stock, which most of that is very liquid. It can be less liquid depending on the, if they're investing in small caps in micro-step caps on the long side, you might not be able to liquidate immediately due to, volume of trading and then they're short and the short aspect there again, as much greater liquidity.

That makes sense that they would be able to get something back in, a month to three months. There, again, it's just understanding how it all works at the alternative level. And then making sure that what they're offering you from a liquidity standpoint matches the asset. The one thing you want to be careful about is someone says I can get you monthly liquidity, but I'm in projects that take five years.

Okay. You got a question. Does that manager actually know what he's doing? Because he just created what they call an asset-liability mismatch. You're his liability of I want my money back in a month, but he's not going to be able to get it to you. And if he can get it to you, you need to dive in a little bit extra and understand, wait a second, this guy's in a five-year project, but he says he can get my money back monthly.

You got to really understand what he's doing. Is he leveraging, what is he doing to create liquidity, to create that, that, that would be a, that would be a big red flag for me. When you're looking at that.

Rachel: And then the last one I see here is where can I find different alternatives to invest in?

Chris: Oh yeah.

I'm not gonna lie to you. And sometimes that can be difficult for two reasons. One finding the right avenue of what you're looking for in two, as I said, there's a lot out there. So you can be flooded with too many opportunities to look at. We talked a little bit about that. Some of the sourcing can come from investment clubs and networks that you can join or find sometimes your accountants, your lawyer perhaps even in the future you might find, other counterparties like your custodians and other people.

Having databases available for things to consider. There are some third-party services out on the web that specialize in real estate or venture that can guide you to I know in angel investing, there's lots of angel investment clubs in all the major cities. We've got four or five here in Seattle.

Obviously California is just, it's like a shotgun went off with the number of different angel groups that you can get in California. Sit in on some of those meetings. Most of those are free. Just go sit, hopefully have a nice lunch, listen to some pitches, talk to some of the other angels, and see if that's a group you want to be a part of if that's the type of investment you're looking for.

So there are avenues out there to find a variety of different No alternative investment platforms. But it does take a little bit of work. You got to set aside the time and see who you want to belong to and how you're doing that. I know you're going to trust to supply that information to you.

Rachel: All right. And that is all that I see on my end. So thank you so much, Chris, for joining us today, you've been really awesome at giving us some great information and diving into alternatives. Thank you everyone for joining.

Chris: Thank you very much. Thank you.