Diversify beyond conventional means. Alternative asset classes offer specialized investments to enhance your portfolio.
Alternative investments are gaining significant traction, with allocations rising rapidly across institutional investors, family offices, and high net worth individuals. According to a 2023 survey by Goldman Sachs, the average allocation to alternatives among institutional family offices now sits at 44% of portfolios. This is up notably from an estimated 20-25% average allocation a decade ago. These specialized assets are moving steadily towards the mainstream.
Driving this growth is rising demand for diversification and yield, as traditional stocks and bond returns moderate. Alternatives like real estate, litigation finance, and commodities offer returns driven by factors distinct from broader equity investments and credit markets. A 2022 report by Preqin found that global alternative assets under management swelled to $13.3 trillion in 2021, up 10.3% over 2020, and are forecast to exceed $23 trillion by 2026.
These numbers show one thing for certain: the worth of alternative asset classes isn’t going away anytime soon. This beginner’s guide will get you up to speed on incorporating alternatives to enhance portfolio diversification and returns.
ARTICLE SUMMARY
- Get Acquainted: Introduction to major alternative asset categories like real estate, commodities, and private equity.
- Unique Benefits and Advantages: Overview of the unique portfolio benefits and advantages of alternative investments.
- Experts’ Take: Experts suggest limiting overall alternative allocation to 10-20% of the total portfolio.
- Implementation Guidance: Phase in gradually, diversify across asset classes, and rebalance to manage risk.
- Evaluating Managers: Assess expertise, team capabilities, transparency, risk management, and institutional backing.
- Siltstone Capital’s Expertise: Specialized experience in overlooked niches like minerals, royalties, litigation finance, and real estate.
- Contact us: Explore how prudent allocations to alternatives can enhance portfolio growth and resilience with Siltstone Capital.
Looking to diversify beyond conventional stocks, bonds, and cash? Alternative asset classes offer a broader universe of specialized investments to potentially enhance portfolio diversification, income, and risk-adjusted returns.
As alternative assets are forecast to grow at a compound annual growth rate (CAGR) of 10% through 2026, investors seek diversification. But these complex investments require education. This comprehensive guide navigates the full landscape of alternative asset classes so you can make informed allocation decisions.
At Siltstone Capital, our alternative investment expertise helps investors like you find overlooked opportunities and drive real portfolio value. Read on to increase your know-how!
Alt Assets 101 – An Intro for Beginners
Alternatives include assets beyond the conventional categories of stocks, bonds, and cash that dominate most portfolios. Alternatives have less regulatory requirements versus traditional investments. Real estate, commodities, hedge funds, private equity, royalties, litigation finance, and more fall under this umbrella term. Private equity aims to generate higher returns by encompassing investments in private companies, venture capital, and leveraged buyouts compared to public market stocks.
These assets tend to have low correlations, meaning their performance zigs when markets zag, moving independently rather than in lockstep with traditional markets. Their returns are less correlated and move independently from the equity markets. Such specialized assets share key characteristics that differentiate them from mainstream investments:
- Specialized expertise needed to research and manage them effectively.
- Less regulation leading to limited transparency in some cases.
- Lower liquidity with longer lock-up periods for investors.
- Returns driven by niche factors uncorrelated to broader markets.
- Higher complexity and due diligence requirements.
Adding alternatives to traditional asset classes provides welcome diversification for many portfolios. However, alternatives introduce more complexity and volatility, and thorough education is needed to invest effectively. For accredited investors open to modestly higher risk, these distinguishing attributes can also unlock portfolio diversification, yield, and risk-adjusted returns difficult to capture through just stocks and bonds.
3 Core Alternative Asset Categories
So, what are alternative assets, anyway? Here is a brief overview of three major categories:
1. Real Estate
Investments in rental properties, real estate investment trusts (REIT), real estate funds, and direct property ownership. Can provide steady cash flow from rent payments, inflation hedging as values rise, and portfolio diversification.
2. Litigation Finance
Providing funding for lawsuits in exchange for a share of proceeds if successful. Returns are disconnected from financial markets but require legal underwriting expertise.
3. Commodities
Exposure to precious metals, oil, natural gas, agricultural products, minerals and other raw materials and natural resources can hedge inflation but have high volatility requiring research. Gaining exposure via funds investing in the underlying commodities or derivatives based on them is generally best for individual investors.
Adding such alternatives can enhance returns, reduce volatility, and provide downside protection since their performance tends not to closely track traditional market cycles. More and more informed investors are taking the less beaten path, and for good reason.
Evolution of Alternative Investing
Alternative investments were historically quite niche, reserved mainly for institutional investors like pensions, endowments, and sovereign wealth funds. But the asset class has evolved and opened up to individual investors over the past decades. Proliferation of alternative investment products like funds and ETFs boosted accessibility.
Key factors driving increased adoption include:
- The JOBS Act of 2012 eased accredited investor requirements, expanding access.
- Proliferation of alternative investment funds boosted accessibility for individuals.
- Low bond yields pushed investors to seek additional yield opportunities.
- The 2008 financial crisis highlighted the benefits of diversification beyond just stocks and bonds, and exposed concentrated portfolio risks.
- Innovation expanded alternative investment types, like litigation finance emerging as an asset class.
- Declining bond yields are pushing investors to seek additional income sources.
- More liquid, regulated alternative investment funds and exchange traded funds (ETF) increased accessibility.
- Financial innovation expanding the menu of alt assets, like crypto.
- More resources helping investors implement prudent alternative allocations.
Ongoing financial innovation around blockchain, digital assets, data analytics, and technology will likely continue improving alternative investment accessibility and adoption. Investor familiarity with these specialized assets has risen markedly – a virtuous cycle enabling further growth.
Alternatives once considered obscure are now moving towards the mainstream as investors recognize their portfolio benefits when allocated properly. However, it is important to not approach doing so cursorily.
Allocate Alternatives Gradually and Prudently
What’s a judicious approach for allocation? Experts suggest limiting overall exposure to 10-20% of your total portfolio, with individual investors at the lower end unless they have high risk tolerance.
When starting out, prudence calls to phase your allocation in gradually over time rather than all at once. Monitor performance over market cycles before slowly increasing your target exposure.
Reasons for gradual allocation include the illiquidity of some alternatives, making overallocation difficult to correct. Concentrated risks also exist in niche markets. Phased addition allows monitoring asset performance across market cycles before increasing target exposures.
Alternatives may introduce more complexity and volatility versus traditional investments. Combining liquid alternative mutual funds with some direct investments can allow appropriate liquidity. As such, prudent allocation requires assessing one’s risk tolerance, return objectives, time horizon, and liquidity needs. Wisdom suggests working closely with your advisor to select strategies fitting your risk appetite and specific diversification needs. Combining liquid alternative funds with some direct investments can allow you to gain exposure with appropriate liquidity.
Diversifying across multiple alternative asset classes reduces concentration risk. Periodic rebalancing maintains target exposures as values fluctuate. With reasonable sizing, broad diversification, and gradual implementation, alternatives have the fundamental benefits to meaningfully enhance portfolio growth and resilience without taking on excessive risk for most individual investors.
Choosing the Right Alternative Investment Managers
Selecting experienced and reputable fund managers is critical when venturing into alternative investment decisions. Six areas to assess managers for long-term success and fit include:
1. Relevant Experience and Laser-Focused Expertise
The manager should have direct investing experience and a proven track record specifically within the asset classes covered. A long history of strong risk-adjusted returns is ideal.
2. All-Star Team
Alternative asset class strategies demand specialized expertise across real estate, legal, data analytics, finance, and more. Evaluate if the manager has adequate multi-disciplinary talent on staff with complementary skill sets.
3. Compliance and Controls
Ensure the manager employs best practices around compliance, audits, accounting standards, and operational controls. This is essential for reducing risk.
4. Risk Management
Given their complexity, alternative investments warrant managers with robust risk management practices. Evaluate their risk mitigation approaches.
5. Total Transparency
Managers should provide transparency into their investment strategy, holdings, fees, liquidity terms, risk controls, and operations. Lack of transparency is a red flag.
6. Blue-Chip Backers
Examine the manager’s current institutional investor base. Institutional clients like pensions validate operational excellence and credibility.
Take time to thoroughly vet managers in these areas to identify trusted partners to navigate the world of alternatives. By identifying who can help you to succeed, your partnership will deliver long-term alternative investment performance. Your manager should be collaborating in your success.
Why Partner with Us? – The Siltstone Capital Difference
What truly sets Siltstone Capital apart from other asset management peers in the alternatives space is our team’s deep operational experience and hands-on expertise specific to the energy, metals, mining, and oil and gas sectors.
Based in Houston, Siltstone Capital is an alternative investment and advisory firm laser-focused on uncovering overlooked opportunities across real assets – from minerals and royalties to litigation finance and underappreciated real estate.
This niche industry focus equips our team to accurately evaluate the upside potential in complex assets like minerals and royalties, zeroing in on opportunities that generalized alternative managers tend to overlook.
Our collaborative culture also strives to provide transparency and closely align incentives with our clients each step of the way. Client education and shared accountability help drive our mission to deliver steady cash distributions, appreciation, and downside resilience.
And, through rigorous boots-on-the-ground research and leveraging cutting-edge data analytics, we aim to maximize risk-adjusted returns and provide our clients differentiated alternative investment exposure.
Let’s touch on Siltstone Capital’s core alternative asset classes.
Mineral and Royalty Rights – Targeting Hidden Mineral Investment Treasure
At Siltstone Capital, we specialize in identifying overlooked mineral and royalty acquisition opportunities, predominantly in the oil-rich Permian and Appalachian Basins.
A mineral right entitles you to all the goodies underground – think oil, natural gas, gold, silver, and more! Royalties give you the right to receive juicy revenue slices from mineral production without operational costs.
We deploy our geoscience and energy expertise to pinpoint high-quality minerals and royalties in prime basins like the Permian and Appalachia. Focusing on assets with likely near-term production generates a steady cash flow feast along with long-term growth potential.
In collaboration with our clients and partners, we target several prime benefits:
- Exposure to real assets uncorrelated to stock markets
- Monthly cash distributions from royalties
- Upside as production expands over time
- Inflation protection as commodity prices rise
- Tax advantages unique to mineral assets
By maintaining a strict focus on minerals and royalties primed for near-term development, our approach aims to deliver a combination of resilient cash yield and long-term growth for our investors.
Real Estate – Harvesting Income from Niche Places
Siltstone invests in niche real estate like farmland, manufactured housing communities, and recreational parks. These unleash income through rents and leases while offering stability and growth potential.
Key advantages:
- Steady cash flow from rents/leases
- Inflation protection as rents increase over time
- Lower volatility than stocks
- Tax perks and investment portfolio diversification
Our hands-on approach enhances returns from real estate assets while generating robust risk-adjusted yields for our partners.
Litigation Finance – Legal Funding for Returns Untethered to Financial Markets
Litigation finance is a distinctive asset class that Siltstone Capital expertly navigates. We specialize in funding high-value commercial lawsuits, specifically within the energy and technology sectors, leveraging our deep industry knowledge for an edge. In return for shouldering the risk, we take a percentage of the proceeds from successful settlements or awards.
The advantages of litigation finance are manifold:
- It’s non-correlated to the performance of broader financial markets, offering a unique investment diversification.
- The potential for substantial returns due to large settlements.
- It grants investors a diversified avenue beyond mainstream assets.
- There’s a meaningful social impact, enabling underfunded cases to see their day in court, thus furthering justice.
Harnessing our team’s robust legal and financial expertise, we meticulously assess the merits of each case. This ensures we minimize risks and focus on lawsuits with the highest probability of favorable verdicts. For accredited investors, litigation finance presents an opportunity for returns that stand apart from traditional assets.
Ready to Diversify with Alternatives?
While adding alternatives may introduce more complexity, the benefits for your overall portfolio in terms of diversification, risk-adjusted returns, and yield generation can be compelling. In that spirit, we hope this guide has armed you with knowledge to sagaciously allocate to alternatives.
Are you ready to dive into successful investing in alternative asset classes? Our team is here to collaborate with accredited investors on venturing beyond stocks and bonds.
Contact Siltstone Capital today to start exploring overlooked alternative opportunities.
