Opportunity Zone Pitch Day - March 23rd
The Alts Opportunity For High Net Worth Investors
On the inaugural edition of The Alternative Investment Podcast, we answer key questions about alternative investments and why high net worth investors should consider alts for their portfolios.
Click the play button above to listen to our conversation.
- What alternative investments are.
- The three key reasons why high net worth investors should consider incorporating alts into their investment portfolios.
- Drawbacks to alts, and why they may not be suitable for everyone.
- The different types of alts that are available to investors.
- An introduction to show hosts Jimmy Atkinson and Andy Hagans.
- What we’ll cover on future episodes of The Alternative Investment Podcast.
Featured On This Episode
- Jimmy Atkinson on LinkedIn
- Andy Hagans on LinkedIn
- Opportunity Zones Database
- Opportunity Zones Podcast
- There’s no such thing as a free lunch
- ETF Database
About The Alternative Investment Podcast
The Alternative Investment Podcast covers new trends in the alternate investment landscape. Hosts Jimmy Atkinson and Andy Hagans discuss diversification opportunities in the alts universe, including direct investments, DSTs, opportunity zones, private equity and more.
Jimmy: Welcome to The Alternative Investment Podcast. I’m your host, Jimmy Atkinson.
Andy: And I’m your co-host, Andy Hagans.
Jimmy: Andy, pleased to be with you here today. I figured this is our first episode, the inaugural edition of The Alternative Investment Podcast. So on today’s episode, let’s answer some really basic and key questions. One, what are alts? And two, why should self-directed high net worth investors consider alternative investments for their portfolios? But first, Andy, what are we even doing here? What’s the purpose of this podcast? And what do we got going on with today’s episode?
Andy: What are we doing here? Well, we’re talking about alts and more specifically, our mission with this podcast is to help self-directed investors invest in alts, right? Because alts are a sector in the investing landscape where it’s pretty murky, right? It’s not as clear-cut. There’s not as much information available as there are with traditional asset classes. So it’s our goal to demystify the alts universe, and then also talk about some attractive investment opportunities.
Jimmy: Fantastic. So let’s dive in then. We wanna talk about alts. What are alts? Can you define alts for us, Andy? And what do you mean when we say that? Like, is there a clear concise definition you can give us or…?
Andy: Goodness, gracious. So that should have a short answer, but it doesn’t, but I’m gonna give you the best answer that I can. So there’s no quote-unquote official way to define alts, right? And by the way, sometimes alts are referred to as non-traditional assets or as direct investments.
Zooming out, taking a really big picture view, alts are any type of investment outside of the quote-unquote traditional asset classes, the big three, which are publicly traded stocks, bonds, and cash. And when we say cash in this context, we’re also including cash like very short-term debt instruments, or CDs, things of that nature. So any type of investment that’s not a publicly traded stock or bond or cash is an alt. So that really big picture, that could be anything from a collectible high-value automobile, right? It could be high-value artwork. It could be Bitcoin, oil, gas, private equity, venture capital, real estate. All sorts of things fall under that umbrella.
Now on this podcast, Jimmy, we’re gonna be focusing a bit more, I almost wanna say on the traditional alts, although maybe that’s an oxymoron, but on the types of alts that generate an income, right? So specifically direct investments on real estate, 1031 exchanges, DSTs, Qualified Opportunity Funds, private equity, operating businesses. Those sorts of alts are what we’re gonna talk about.
Jimmy: Sounds good. And then getting back to your earlier point about anything that’s not a stock or bond or cash equivalent. I think when you’re talking about stocks and bonds, you’re also referring to the wrappers that they’re in too, right? Mutual funds and ETFs. We’re not gonna be discussing those in the context of alternative investments. Am I right there?
Andy: You are correct, sir.
Jimmy: Good. So your definition, at least, of what alternative investments are, Andy. Now with that definition, why should high net worth investors, ultra-high net worth investors, family offices, other types of financial advisors, anyone who is directing serious amounts of investible assets, why should they consider alternative investments for their portfolios?
Andy: Well, I’ll give you three good reasons. Okay. The first reason to consider alts for your portfolio is higher returns. The second reason is tax advantages. And the third reason is portfolio diversification. So like limited correlation or non-correlation or even negative correlation to traditional assets. So there’s a lot there that we can unpack.
But one thing I would say Jimmy is, you know, alts are not actually appropriate for everyone’s portfolio, right? If I’m talking to Joe Lunchpail who let’s say is earning immediate income and has access to a 401K through his employer, I would say you don’t need to be looking at alts. You should max out your 401K and probably invest in, like, a three-fund portfolio or a target-date retirement fund or something of that nature. So the alts are really more attractive to high net worth, or very high net worth, or ultra-high net worth investors.
So we’re talking about investors with a net worth of a million and up or 5 million and up, or even what is it? Is it 25 million and up? However, we define ultra-high net worth as well as institutional investors and family offices. So number one, they’re looking for higher returns, right? So a lot of these, especially when compared to bonds or like a 60/40 portfolio, a lot of these asset classes, investors are targeting a return in the 8%, 10%, 12%, 14% range. So it’s a lot higher of a return than you’re gonna receive from the bond market, and a lot of times also from the equity markets, but second of all, and by the way, not all alts are that high up on the risk-return profile, right? There’s also less risky alts.
For instance, a multi-family housing that’s quite stable, that’s not gonna be as high up on the risk return profile, but there are still certain tax advantages to a lot of types of alts. So that brings me to the second reason that investors should consider adding alts to their portfolios are the tax advantages. And again, these advantages, they’re typically worth a lot more the higher your tax bracket is. So again, these are appropriate for high net worth accredited investors to add to their portfolios. They’re not necessarily a good fit if an investor is not accredited, but for instance, Jimmy, let’s take Qualified Opportunity Funds, which I know you’re very familiar with.
Jimmy: One of my favorite topics.
Andy: Exactly. Qualified Opportunity Funds have several tax advantages that sort of stack on top of each other. And so when you’re talking about annual return from a QOF, you really need to look at it on a triple net basis, right? Return after fees, after inflation, and after taxes. And so when you look at the return numbers for a lot of alts, if you’re assuming that the investor is in a higher tax bracket, those tax benefits can be substantial and they can really make the triple net return for the alt a lot more impressive. Right?
And then lastly, the last reason that a lot of investors are looking at alts is the diversification benefits. So depending on the alt in question, right, whether we’re talking about a REIT or any type of real estate, or we might even be talking about a Bitcoin to use an extreme example, but alts are often have limited correlation to the traditional assets. Sometimes they have no correlation or even negative correlation to traditional asset classes, right? So the idea is in times of market volatility, you can limit the drawdown of your overall portfolio.
So those are the big three reasons, higher returns, tax advantages, and portfolio diversification.
Jimmy: Yeah, fantastic. So there’s some great reasons there. I always say at least with Qualified Opportunity Funds or, you know, otherwise known as opportunities on investing, I say, “Come for the tax advantages, stay for the higher returns and the portfolio diversification,” because that’s kind of the lure that brings in the crowd. Right?
Andy: Could you repeat that one more time?
Jimmy: Come for the tax advantages, stay for the higher returns and the portfolio diversification.
Andy: Can I put that on a bumper sticker?
Jimmy: I think we can. Yeah. I think I may have just created our new slogan.
Andy: It would have to be a very wide bumper sticker.
Jimmy: We’ll workshop it, but I think we’ll get there. Okay. So those are our three key reasons why some investors would benefit from considering alternative investments or alternative asset classes in their investment portfolios. So Andy, what are some different types of alts that investors should consider? And I don’t know if you wanna talk about the different asset classes available or the different wrappers that are available, but I’ll leave it to you. What are some types of alts that investors should be looking at?
Andy: Sure. So some of the bigger categories in the alts universe are going to be private equity that’s a huge category. including venture capital, sort of a subcategory that’s its own thing. You also have real estate, and especially Jimmy, the tax-advantaged real estate alts, including 1031s, direct investment, DSTs, Delaware Statutory Trusts, and QOF, which are Qualified Opportunity Funds. So those are really the biggest topics that I think we’ll be discussing on this podcast.
But, you know, you also have more niche, little different pockets of the alts universe. Like you have business development companies, you know, non-listed BDCs, you have energy programs, energy partnerships, life settlements. I mean, talk about non-correlation to the stock market, equipment leasing, litigation finance. Depending on who you ask, you might say hedge funds are a type of alt. Although sometimes they just end up owning those traditional asset classes. So it sort of depends on the hedge fund in question.
And then you also have those sort of separate worlds of precious metals and crypto and collectibles. And I do think those are very interesting, but we’re probably not gonna talk about those as much on our podcast.
Jimmy: And sometimes you can even exposure to those through publicly traded securities like ETFs and ETNS. Is that right?
Andy: Yeah. Good point.
Jimmy: There’s gold ETFs. There’s different types of hedge funds strategy ETFs that you can invest in, but I don’t know that we’re gonna be really discussing those on this podcast or on our website.
Andy: No I think we’re gonna be talking a lot about private equity and real estate, especially tax-advantaged real estate.
Jimmy: All right, Andy. Good. So why investors should consider alts. We’ve got several examples of different alts that are available. It sounds great, right? I mean, there are a lot of upsides to alts investing. What about some of the downsides? Why might some investors not invest in alts, or why are some types of alts maybe not appropriate for some people like you mentioned before? Are there any downsides?
Andy: Jimmy, I’m glad you asked and let me give you some free advice. Okay? There’s no such thing as a free lunch. So if we’re talking about higher returns and tax advantages, I think that’s the next question that everyone should ask are, what’s the catch? What’s the downside? And some of these things are really double-edged swords, Jimmy.
So for instance, the fact that alts tend to be non-correlated or have low correlation to the traditional asset classes. Well, in many cases, that’s because they’re not liquid, right? They’re illiquid. And so that would be, right off the bat, I think that’s one huge possible drawback. Sometimes though it’s a double-edged sword when an investment is not very liquid, it almost can psychologically protect an investor from selling at the market bottom, which is…
Jimmy: It forces you to hold because there’s no way to sell. Right?
Andy: Right. So it sort of limits behavioral risk. But I think you have to say though, illiquidity overall is a drawback, right? And almost all are relatively illiquid when you compare them to the traditional asset classes and there’s sort of a spectrum, right? So different types of alts will be more liquid than others, but it’s a…I should actually say different types of alts will be more illiquid than others.
Okay. So that’s one drawback. I’d say another drawback of alts is that it’s hard to get information about alts. It’s not like if you’re reading up on a particular stock, you can just Google AAPL stock or whatever the publicly traded stock is. You’re gonna be almost overwhelmed with how much information you’re gonna get on that stock. So with an alts especially on a more niche fund, a private fund, a smaller fund, there’s gonna be very little information that’s out there outside of what the sponsor themselves provides with you, or maybe some, you know, tax forms or regulatory forms that they give you.
So an investor has to do their own due diligence or they have to lean on their financial advisor or attorney accountant or other professional that’s gonna help them do their due diligence. So they’re just not as accessible as the traditional asset classes, especially the wrappers that you mentioned with those traditional asset classes like an ETF or an index fund. They’re so accessible. They’re so easy to understand. And that’s why I said if you’re Joe Lunchpail who’s just maxing out his or her 401k, I’d recommend a three-fund portfolio without any alts.
Jimmy: And something low cost also.
Andy: Exactly. Which brings me to my next drawback of alts, is you’re gonna have higher fees, right? But on the other hand, I think it’s important to contextualize that because almost any alt product that you invest is going to be actively managed, right? So any actively managed fund or operating business, there’s gonna be a pretty substantial cost that’s associated with managing that business or managing that investment. So you’re gonna have to pay fees commensurate with that active management.
So we have illiquidity, we have complexity, and we have higher fees than what a lot of investors are used to. I mean, when we’re talking about ETFs, like aren’t there some ETFs with what are we talking, three or four or five basis points in their annual fees? So those are just rock bottom costs of passive management. In the world of alts, we’re switching gears and we are in the active management world.
Jimmy: Right. And they’re just not as accessible, they’re off-market. There’s a lot less transparency into them, as you mentioned. So all good reasons why you may wanna pump the brakes and make sure you really do your due diligence before you invest in any type of alternative investment class. There’s just a little bit more to it than simply logging onto your brokerage account and buying some AAPL stock or buying some SPY ETF, or whatever the case may be.
Andy: Jimmy, if I could jump in there, the place that alts have in a portfolio, it’s all dependent on the investor in question, right? So for a high net worth investor with a net worth of, let’s say, $3 million, they may want to have 10% of their portfolio, $300,000 in alts but a relatively low amount. An ultra-high net worth investor with a net worth of, let’s say, a 100 million or a family office, they’re probably gonna have a more substantial slice of their portfolio that’s devoted to alts, right? Because really if you think about what the portfolio is, you wanna have that anchor, right? Of stocks and bonds of those traditional assets until an investor is confident that their retirement account is funded to the point where it needs to be. So alts are more about opportunity and managing a portfolio of a certain size.
Jimmy: That’s a great insight right there. I agree. So I think we’ve attacked a lot of the main topic of today’s episode, basically an alts 101 crash course, and why we think some investors should consider alternative investments in their portfolios. But what about you and me and what’s coming next, Andy? I want the listener to get to know us a little bit. Maybe we can talk about our backgrounds and then look ahead to what’s coming in the future for this podcast. What do you think?
Andy: Sounds great. Well, why don’t I go first?
Jimmy: Go for it.
Andy: Yeah. My name is Andy Hagans. I am located in southwest Michigan. Beautiful southwest Michigan. And Jimmy, I wanna mention how you and I met each other. We were actually college roommates at the University of Notre Dame. Go Irish!
Jimmy: Go Irish!
Andy: And we started a business out of our dorm room, right? So almost the apocryphal dorm room startup.
Jimmy: We were those two guys, right?
Andy: Exactly. We both had the entrepreneurial bug. So professionally, I’ve been a serial entrepreneur. I love startups and I also love investing. So another startup that I was involved with in the investment space with you, Jimmy, is we co-founded the ETF database, which grew to be the largest ETF-specific media property in the United States covering ETFs. And we ended up exiting that business. It’s still an ongoing property. They do a great job actually. So it’s still a great resource, ETFdb.com.
Jimmy: Yeah. I was gonna say ETFdb.com
Andy: Gotta pump the URL. Exactly. But since that time, I’ve been involved in several ventures. I’ve had a couple businesses that I’ve exited to strategic acquirers. I’ve dabbled a little bit in private equity. And so I’ve sort of been involved in this alts universe from a couple different angles. And honestly, I just love it. It may sound strange that it’s a passion for me, but it is. And you started the Opportunity Zones Database, which I’ll let you talk about in a second. But I just wanted to mention that the Opportunity Zones Database has been very successful and you invited me to help you out and join your team in part because we wanted to expand our scope outward from just covering opportunity zones investing to covering the entire universe of all. So I’m very excited to do that with you, Jimmy.
Jimmy: Yeah, that’s right, Andy, and I’m excited to have you onboard the team here now at OpportunityDb.com. And like you, I mean, great entry you gave yourself and you included me in it as well. So I’ll just kind of fill in the gaps as much as I can, but like you, Andy, I’m also a serial entrepreneur. I’ve had a lot of different startup businesses over the course of my career. I haven’t had a real job in about 20 years or so at least. I’ve been my own boss for a very long time, and I’ve worked on several different business ventures with you, Andy, over the last couple of decades.
I live in Fort Worth, Texas. I’m involved in, like Andy mentioned, several different opportunities zone-related businesses. The primary one is the fact that I am the founder of the Opportunity Zones Database at opportunitydb.com as Andy mentioned. I’m also the host of the Opportunity Zones Podcast, which is that industry’s largest, most listened to podcast.
I’m also the co-founder of a consulting business in that space called OZ Pros. And I’m a co-founder in OZworks group, which is a premium community for opportunity zone stakeholders. And that business has grown quite a bit and the following there has grown quite a bit to the point where I was starting to get overwhelmed. So I brought on some new partners and Andy is one of them and glad to be working with you on that property and those opportunity zone businesses, Andy.
And of course, our next step here is to expand into alts, to zoom out, as you mentioned because we do consider Qualified Opportunity Funds to be just one slice of the larger alternative investment pie. So we wanna cover more of the pie, right? Did I hit everything there, Andy?
Andy: No, I think you hit the nail on the head. So that other website is opportunitydb.com. And I should also mention the URL associated with this podcast is altsdb.com. That’s where we’re hosting the alternative investment database.
Jimmy: That’s right. So we’re gonna have a database of all different types of alternative investments from DSTs, to Qualified Opportunity Funds, to other types of direct investment wrappers and funds and investment types, and also some private equity as well. Did I get that right, Andy?
Andy: You got it.
Jimmy: Good. So what’s coming next, Andy? What’s coming down the pike for The Alternative Investment Podcast? What are we gonna cover on future episodes here?
Andy: So in our next few episodes, we are gonna dive right in, get our hands dirty, and we’re gonna be covering QOFs, Qualified Opportunity Funds, as well as DSTs, Delaware Statutory Trusts. So if you are an accredited investor and you’re sitting on a large capital gain from 2021 or really whenever you’re listening to this, or if you have the ability to generate a capital gain but you’re looking for a tax-advantaged investment vehicle to plow that capital gain back into, I think these next two episodes will be very interesting for you. And then down the pipe, after that, we’re gonna be looking at bringing on some guests to talk about private equity investing as well as direct investments in real estate.
Jimmy: Fantastic. Well, I’m looking forward to it, Andy. Thanks for joining me. For our listeners out there, we’re gonna have more information on this podcast and you can learn how to subscribe to this podcast and you can read the show notes for today’s episode on the altsdb website. You can find those show notes at altsdb.com/podcast, and there, you’ll find links to all of the resources that Andy and I discussed on today’s show. Andy, this has been great. Let’s do it again soon.
Andy: This has been awesome. Thanks Jimmy.