Investing Beyond Wall Street With Alternative Assets

When it comes to investing, there’s a misconception that the stock market is the only way to get rich. Alternative investments, however, offer a diverse and potentially lucrative landscape for those who’re open to exploring beyond what’s being sold on Wall Street. 

Ben Fraser, the Managing Director of Aspen Funds, a fund manager who runs real estate funds for investors looking for a diversified portfolio outside of Wall Street, has proven this. With that said, in this article, we will discuss how you can capitalize on alternative assessments.

From Banking to Alternative Assets: A Journey of Discovery

Before getting too far ahead of ourselves, we should talk about Ben’s background.

Ben’s experience came from the banking industry, where he underwrote and analyzed deals. Despite this, he eventually realized the limitations of traditional financial systems. As such, this motivated him to pursue a more growth-oriented and opportunity-driven approach, which led him toward alternative investments. 

Having the opportunity to see everything is the benefit of being an underwriter, according to Ben. As a result, you can see their financial statements, tax returns, and deals they’re engaged in. 

Ben recalls one of the lightbulb moments he experienced when he was younger in his career. Many of those borrowers he saw were high net-worth borrowers and they were doing a lot of business.

“And banks love rich people,” he explains. “So, generally, a lot of the customers, especially the bank, a business bank that I was working at, led to a lot of wealthy individuals.” The common theme with these customers was that they owned businesses, or that they owned real estate.

It was at that point, that Ben knew he wanted to get involved with alternative investments. 

The Different Types of Alternative Investments

In general, alternative investments are something that offers an alternative to stocks, bonds, and mutual funds.

Alternative investments include hedge funds, private equity, venture capital, oil & gas, and real estate, according to Ben’s article for Aspen Fund. In some cases, gems and precious metals, art & antiques, and collectibles are included in the definition.

Among the most common alternative investments are:

• Hedge Funds. Funds like these can invest in all sorts of things, but they’re usually limited to publicly traded securities. The goal is to use their specific strategy to generate returns in ups and downs, regardless of the market.
• Venture Capital. Firms like these invest in privately held companies. It’s usually a start-up or early-stage company trying to grow fast and eventually exit either by acquiring another company or going public.
• Private Equity. As the broadest category of private investments, it includes everything else but venture capital. A fund manager in this class can manage funds ranging from a million dollars to multiple billions of dollars. In addition to real estate and infrastructure, they invest in oil & gas and debt. One of the biggest subsets of private equity is focused on taking control of operating companies.

For most investors, private equity alternatives will be more beneficial than hedge funds and venture capital investments, especially since they are where the greatest gap exists. 

The Allure of Alternatives: Why Go Beyond the Stock Market?

Overall, compared to traditional equities, alternative investments offer several key advantages. The main advantage of these products is that they are uncorrelated with the stock market, providing diversification as well as protection against market declines. Aside from providing higher potential returns, alternative investments can also provide greater control over investment decisions and access to cash flow.

But, let’s take a closer look at the benefits of attentive assets, according to Ben.

• Uncorrelated with the stock market. Investments that are uncorrelated to the stock market do not fluctuate with the stock market. In reality, REITS and other publicly traded alternatives are just as volatile and do not add much value to investment portfolios. 
• Diversification. In order to maximize returns and avoid over-allocating assets to a particular class, portfolio diversification broadens portfolio exposure. “Don’t put all your eggs in that basket,” Ben says, “but it’s good to be diversified.”
• There is no volatility. The price of traditional public investments fluctuates based on a variety of factors, but they are not correlated with actual assets. You avoid the volatility of public investments when you invest in a private investment. Furthermore, most investments come with a real asset to back them up.
• You have direct ownership. Generally, public investments are paper assets – future earnings discounted to present value. The bottom line is that you really don’t own anything. You’ll have a long way to go before your name appears on the title of the real estate property even if you invest in a REIT. “I’d rather take the illiquidity risk in the private markets buying that deal and honestly having a little bit more ability to control the outcome than I do in the public markets,” Ben says.
• Passive investments. It is possible to generate a steady income stream from alternative assets, such as rental real estate, at a higher yield than from dividends or interest payments.
• Profitable income. The majority of private alternative investments are not cash-flowing investments, meaning they don’t pay you back monthly or quarterly, but there are those that do, usually in the real estate sector. Some of these investments can produce a strong income, in the range of 8-10% per year. In many funds, cash is paid first to investors as a preferred return.
• Direct tax benefits. Long-term capital gains treatment and pass-through depreciation are the two most important tax benefits. It is common for real estate funds or syndications to deduct depreciation expenses (non-cash expenses) from net income, thereby reducing taxable income. The depreciation/depletion tax treatment for oil and gas investments is extremely favorable.

Examples of High-Performing Alternatives: Real Estate, Self-Storage, and More

While we’ve gone over the different types of alternative investments, Ben is big on asset classes like rent growth, multifamily trends, and self-storage. Those assets have experienced massive rent growth, and both of them are very inflation-proof. However, it’s very hard to buy them at a decent price. 

As Ben explains, the goal of these different strategies is to develop, to do development projects or at least have an opportunity to develop through the purchase of a self-storage facility. For example, adding more square footage and developing it will allow for a great deal of margin.

In general, your basis is so low, and there aren’t too many ways for you to lose. Therefore, you can at least hit a home run if you do enough research and know that there is a market there for it.  There is a similar trend in the industrial space right now. 

It is important to remember that current inflated valuations emphasize the importance of creative strategies such as conversions and development projects for unlocking value.

Contrarian Investing: Finding Opportunity in Retail Strip Centers

One of Ben’s contrarian investment strategies is buying retail strip centers. Ben argues that the “retail apocalypse” has been overblown due to the rise of e-commerce. 

In case you are unfamiliar with contrarian investing, it means putting your money into assets that go against the trend of the market.

For Ben, this means finding hyperlocal, neighborhood strip centers with a strong tenant base and the potential for creating value through improved management, tenant selection, and lease renegotiations. With high cap rates and attractive purchase prices, this strategy is even more appealing.

Key Takeaways: Diversification, Opportunity, and Control

The importance of diversification in building wealth cannot be overstated by Ben and me. People can achieve superior returns if they look beyond the stock market and explore alternative investments. 

Additionally, they emphasize the control and active management aspects of alternatives, giving investors more control over their finances.

Conclusion: A Call to Action for Alternative Investing

The world of alternative investments can be exciting, and I hope this article sheds light on it. However, to realize their financial goals and establish significant wealth, individuals should consider the benefits, explore different strategies, and seek professional advice. 

Ultimately, private alternative investments offer a lot of opportunities. What’s holding you back from embarking on a wealth-building journey?