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PENSCO Blog

PENSCO Blog

Fresh alternative asset insights and the latest news on real estate and private equity investing.

Alternative Investments: Understanding Liquid Alts vs Real Assets

  |  By Christopher Orr, SDIP

In the wake of August's market swoon, numerous articles have highlighted alternative investments and how they performed during the global market rout. Alternative investments are meant to diversify portfolios and help them weather market swings, like the one that sent the Dow plunging 1,000 points on Aug. 24. The problem with headlines about alternatives is that they often lump liquid alternatives in with real assets, but it's important for investors to understand the differences.

Let’s start with liquid alternative funds, which I have blogged about before. Their performance was recently discussed in the Wall Street Journal, and they have been referred to as hedge funds or private equity funds for the masses. Liquid alt funds often employ investment tactics traditionally found in hedge funds, such as using leverage, derivatives or short selling. They’re intended to provide investors with access to alternative investments but with the added advantage of daily liquidity. Usually packaged as either mutual funds or exchange-traded funds (ETFs), investors can buy and sell them at will. Unlike most traditional alternative assets, they have little or no investor minimums and typically don’t have lockout periods where investors can’t withdraw their funds.

But because they offer daily liquidity these funds are precluded from holding a lot of the alternative assets that are known for delivering strong returns. These liquid alternative funds are also legally bound by diversification requirements and leverage limits, making it impossible to get the same composition as private alternative assets. The Wall Street Journal also points out that while most categories of funds that are sometimes characterized as “alternatives” lost less than the S&P 500 index in recent months, they generally declined by more than US intermediate-term bond funds, the classic portfolio diversifier.

Real assets include a variety of hard assets such as real estate, farmland, oil & gas, precious metals and physical commodities. Real assets are experiencing strong inflows, according to a recent blog on AllAboutAlpha.com, as investors look to diversify their portfolios with long-term alternative assets that are not correlated to stocks and bonds, that are not as volatile when markets fall, and compare favorably with S&P returns in rising markets. Investors are also attracted to the steady cash flow produced by a variety of hard assets, which can help to add gains on the upside while limiting losses in down markets.

AllAboutAlpha includes this chart, which shows the average annualized returns of real assets compared with traditional ones, like stocks and bonds:

At PENSCO, we help investors hold alternative investments in their self-directed IRAs and it’s important that our clients understand exactly which type of “alternative” asset they are investing in before counting on it to support their retirement fund.

While investors can own exchange-traded assets like liquid alts in their self-directed IRAs, many of our clients opt to invest in real assets such as real estate, farmland or precious metals. Retirement investors are drawn to their long-term investment horizons, diversification benefits and the opportunity they provide for steady growth and income.

PENSCO’s Blog is purely for educational purposes.  PENSCO does not provide investment, tax, or legal advice nor does it evaluate, recommend or endorse any advisory firm or investment vehicle. Individuals are encouraged to seek professional advice before making any investment decision. Investments are not FDIC insured and are subject to risk, including the loss of principal.