Alternative investments for the rest of us
Alternative investments, such as hedge funds, private equity and venture capital, are restricted to “accredited” investors, typically wealthy individuals who more likely can handle the risk of investing in offerings that have less regulatory scrutiny.
But you don’t have to be an accredited investor to invest like one.
Mom-and-pop investors can gain exposure to investments that mimic the strategies and performance of alternative investments via exchange-traded funds and mutual funds.
Alternative-type investments can provide greater portfolio diversification, add protection in falling markets, cut down on volatility, and generate higher yields and more predictable income streams. But limit “alts” to 10% to 20% of your overall portfolio, says David Jamison, a certified financial planner at Charles Schwab.
Here are some investments that are accessible and provide the benefits of alternatives:
Commodities: Metals, energy and agriculture assets (such as wheat and farmland) are investments that don’t rise and fall in tandem with stocks and bonds — and they perform well in times of rising inflation. One of the largest commodity ETFs is Invesco DB Commodity Index Tracking Fund (symbol DBC), which uses futures contracts to track an index of 14 of the most heavily traded physical commodities.
Convertible bonds: Convertible bonds generate income via interest payments, and they come with the option to convert them into the common shares of the issuing company’s stock. Owning such bonds provides a one-two punch: steady income plus the potential to capture a portion of the stock’s capital appreciation. But having the option to convert to stock comes with a trade-off: You’ll earn a little less in yield. Still, you’ll get exposure to the stock market’s upside with less downside risk.
A solid option is Calamos Convertible (CCVIX), which seeks lower-volatility exposure to stocks. Or consider a cheaper, index-based alternative, iShares Convertible Bond ETF (ICVT).
Cryptocurrencies: Bitcoin, often dubbed digital gold, is an option for investors able to withstand wild price volatility. In 2021, regulators approved the first futures-based ETF that tracks bitcoin. And although it doesn’t invest directly in the largest cryptocurrency, ProShares Bitcoin Strategy ETF (BITO) is a convenient way to bet on bitcoin without having to buy and sell it on a crypto exchange or use a crypto wallet to trade and store it. Because bitcoin often endures massive price dives, limit your exposure to a tiny part of your portfolio and buy on big dips.
Preferred stocks: Investors looking for consistent income can explore preferred stocks — hybrid securities that have both stock and bond characteristics and make regular dividend payments. Preferred shares yield more than common stocks and deliver payouts that are larger than most types of bonds, which is a plus in low interest-rate environments. iShares Preferred and Income Securities ETF (PFF), which tracks an index of preferred securities, currently yields 4.5%. The market value of preferreds can fluctuate, but they typically don’t appreciate at the pace of common stocks. And like bonds, preferreds can be sensitive to interest-rate swings.
Private equity: Gaining exposure to private companies with growth potential is doable via ETFs that invest in private-equity companies. You can also gain access to upstart private businesses early in their life cycle by buying shares of publicly traded private-equity companies and betting on asset managers such as Blackstone (BX), the world’s largest alternative asset manager. Other private equity asset managers include Apollo Global Management (APO) and KKR & Co. (KKR).