Above: Photo by istock.com/aimstock
You’ve finally reached the stock and bond levels and asset mix you’ve been aiming for in your investment accounts. What a wonderful situation to find yourself in. Or is it? “Once you get past your traditional stock and bond and cash portfolio and you have enough of that, or you figure the market maybe is rich after a six-year bull run, you ask, ‘OK, what do I do now?’ ” says Michael J. Freeburg, founding member of Greenwich Wealth Management. What, indeed? Many high-net-worth investors in Fairfield County turn to hedge funds as the next step. But there are a host of other alternative investments that should not be overlooked—and, indeed, could be considered, instead of hedge funds, Freeburg and others argue.
Alternatives include most anything outside of stocks, bonds or cash—think real estate, precious metals, private equity, venture capital, commodities, even coins, cars, wine or artwork, in addition to hedge funds, which can invest in these areas as well. They don’t often come up in the conversation with big-bank brokers and their ilk because most of these investments don’t reward brokers with a commission, nor do their firms make money on the transactions.
Freeburg and his colleague Robert Emerson report that as their clients become more sophisticated and successful, so, too, do their interests in alternative investments. For example, at the request of one high-net-worth client, Freeburg visited Ukraine last year to investigate investment opportunities as the country’s stability was in flux. For other clients he has explored farm and ranchland ownership and management. Emerson devised an income-generating strategy full of volatile-stock buys, call spreads, sells and options for a client who was concerned about volatility in Greece. He helped another client set up a defined benefit plan that helped her salt away an extra $200,000 in retirement funds each year, saving her $70,000 in taxes annually. Emerson and Freeburg have connected art-collector clients with appraisers and dealers; same for wine and metals.
The goal is to help clients advance their financial literacy, play devil’s advocate when necessary and conduct research to help clients vet investments, where help may not exist otherwise. While many advisers don’t involve themselves in alternative investments because they don’t typically make money off of them, Freeburg and Emerson say clients should look for a more holistic relationship with advisers to reach their wide-ranging goals. For example, since the JOBS Act of 2012, which eased restrictions governing investments in small businesses, private lending and crowd-funding have been of interest to high-net-worth clientele in Fairfield County. The result is an almost Wild West–like environment in which lenders or brokers online boast of double-digit rewards to “accredited investors” (net worth exceeds $1 million, excluding residence, and earn at least $200,000 a year, or $300,000 with their spouse). Freeburg warns that many of these sites are plagued with “lax or uneven” underwriting, so his firm is putting together a fund that will invest in a basket of about fifty of these private loans.
As long as investors are accredited, consider putting some investments into alternatives, he says, adding, “Try to do it in as diversified a way as possible, so if there is an upset in one area, it is not going to be systemic.”
HEDGING THE HEDGE
“I’m not even sure what a hedge fund is,” says Freeburg. “What’s the strategy? Is it
a bond hedge fund? Equity long? Equity short? I have found very few that actually hedge.” Emerson adds that hedge funds are lagging the S&P 500 in both down markets and up. Still, with more than $2 trillion in management, they must be doing something right.
- They can gain when the stock market tanks.
- Access to a range of alternative investments, thus improving diversification
- Possible big gains
- Possible big losses
- Expense. The typical fund charges a management fee of 1–2% of assets under management and 20% of profits.
- Largely unregulated and tend not to be transparent about investments.
- Not freely traded, so liquidity can be restricted.
Understand what role you want alternative investments, including hedge funds, to play in your portfolio—and do your homework before investing.