How Asset-Based Finance is Different From the Stock Market

When market volatility is high, it is easy to lose focus of financial goals and react to the ups and downs of the stock market. While it is well known that investors should wait it out during periods of high market volatility, statistics show that investors make impulsive decisions during market downturns. A CNNMoney piece showed how investors, spooked by common concerns and backing away from the table, made the Dow drop 1000 points in early trading.

One type of alternative investment opportunity, asset-based lending, is generally structured to help investors avoid the stock market roller coaster while protecting their principal balance and targeting lower principal risk and higher returns. These types of investment opportunities are typically secured by tangible collateral like properties, machinery, land, etc. Investors who are looking to minimize their risk of principal loss can invest in an asset-based opportunity to provide extra protection for their portfolios in times of market volatility.

Here are a few ways an investment protected by a tangible asset is different from an investment in the stock market:

Asset-Based Finance & Collateral
With an asset-based investment, the investor is making their investment based on the valuation of some held asset that the borrower has – and so, that asset acts as collateral. For example, if a company has bought a new piece of equipment at the cost of $75,000, it can borrow against that asset. The investing instrument created by this agreement, whether it’s a bond or some other form of financing, is backed by that collateral, which means that in a default situation the asset would be sold to repay the principal. In the case of real estate, a first lien position on a property mortgage may act as collateral, and in the case of litigation finance, it will be a first lien position on the future proceeds from a settlement.

This idea of collateral is radically different from the stock market, where the investment is not protected from loss. Investors who put money in asset-based opportunities can sleep soundly knowing that their principal balance has some form of protection against principal losses.

Low Market Correlation
Market-correlated investments rise and fall with the stock market. Indicators like the Dow and the S&P accurately track the worth of these investments. That’s great when the market is up, but what about when it’s not? To really play it smart, investors sometimes have to “bet against the market.” They have to stay in the game when everyone else is running for the exits. Investors have too often relied on their intuition to achieve a return on invested capital within the stock market.

Alternative investments, on the other hand, have different volatility patterns than the stock market, or, in some cases, are completely disconnected from market volatility. For example, an investment in high-end real estate in New York City doesn’t fluctuate by the same indicators as real estate in other areas that are more sensitive to credit cycles. That’s because a row house in Detroit or Philadelphia or Dallas has a volatile value related to common property markets, but the value of a New York Skyscraper is, in some ways, immutable. It’s part of a historic and cultural skyline that will hold value when other real estate investments are under pressure. Litigation finance, on the other hand, will perform regardless of whether the stock market is up or down. That is because as long as there are plaintiffs seeking funding, there will be pre-settlement funding companies, and litigation portfolios to invest in. Alternative investments like lawsuit loans and real estate are a valuable way for investors to diversify outside of the stock market for a potentially more stable and consistent income source.

Diversification
Asset-based finance investments can also be a great way to diversify an investor’s portfolio by evening out a portfolio’s performance with different types of alternative assets. Modern Portfolio Theory teaches us that one way to minimize portfolio risk is by building a portfolio of assets that are not correlated amongst themselves, meaning when opportunity A is underperforming, opportunity B will be performing well, and opportunity C will be on course, etc. That way, no one investment opportunity will be able to swing the portfolio to underperform, instead of evening out the overall performance and yield. In fact, when looking at the performance of diversified portfolios, we often see that they outperform a concentrated portfolio during market downturns.

The nature of asset-backed alternative investments makes it easy to diversify between asset types, geographies, and durations. The performance of a real estate opportunity may depend on the composition of the portfolio ranging in type of development (commercial vs. residential vs. mixed use), real estate geography (metro area vs. suburban), and loan to value (LTV) ratio. Investors can balance their overall investment portfolio between differently performing properties to fill performance gaps or lessen risk.

Investing with the Pros
Beginner investors who are still learning the ropes of choosing what opportunity to put their capital in may benefit from another factor that separates asset-backed investments from stocks. Because there is a certain degree of risk associated with debt investments, originators do their best to perform multiple rounds of due diligence before offering an opportunity to investors. In many cases, the originator retains some portion of the investment opportunity for their own portfolio, investing their own capital alongside a group of investors. Unlike the stock market, where any investor can put money into any stock, asset-based investments have a certain degree of quality that can give investors – new and experienced, peace of mind when investing in alternatives.

Whether you are a new investor or an accredited investor with years of experience behind your back, it is important to note what types of opportunities are available to you and how they can play into your alternative investment portfolio. Alternative investments in asset-backed lending are very different from stocks in that they are backed by collateral, generally have a low stock market correlation, and are pre-vetted by professional originators. Depending on an individual investor’s financial goals and appetite for risk, alternative investments can prove to be a valuable addition to most investment portfolios.

How helpful is this content?

Since inception, over has been invested on Yieldstreet

Join today for free to access alternative investment opportunities.

1 Past performance is no guarantee of future results. Any historical returns, expected returns, or probability projections may not reflect actual future performance. All securities involve risk and may result in significant losses.

2 Represents a net estimated, unrealized annualized internal rate of return (IRR) of your portfolio and is based by reference to the effective distribution dates and amounts to and from the investments, as well as any outstanding principal and accrued and unpaid interest as of the current date, after deduction of management fees and all other expenses charged to the investments.[read more]

3 "Annual interest" represents an annual target rate of interest and "term" represents the estimated term of the investment. Such target returns and estimated term are projections of the returns or term and may ultimately not be achieved. Actual returns and term may be materially different from such projections. These targeted returns and estimated term are based on the underlying agreement between the SPV and borrower or originator, as applicable.

4 Reflects the initial quarterly distribution declared by the board of directors on February 6, 2020, which will be payable to stockholders of record as of June 10, 2020, and the initial offering price of $10 per share.

5 The Fund will cease investing and seek to liquidate the Fund's remaining portfolio no later than 48 months after the Fund's initial closing. It may take up to twelve months thereafter to fully monetize any remaining illiquid investments in the Fund's portfolio.

300 Park Avenue 15th Floor, New York, NY 10022

844-943-5378

No communication by YieldStreet Inc. or any of its affiliates (collectively, “Yieldstreet™”), through this website or any other medium, should be construed or is intended to be a recommendation to purchase, sell or hold any security or otherwise to be investment, tax, financial, accounting, legal, regulatory or compliance advice. Nothing on this website is intended as an offer to extend credit, an offer to purchase or sell securities or a solicitation of any securities transaction.

Any financial projections or returns shown on the website are estimated predictions of performance only, are hypothetical, are not based on actual investment results and are not guarantees of future results. Estimated projections do not represent or guarantee the actual results of any transaction, and no representation is made that any transaction will, or is likely to, achieve results or profits similar to those shown. In addition, other financial metrics and calculations shown on the website (including amounts of principal and interest repaid) have not been independently verified or audited and may differ from the actual financial metrics and calculations for any investment, which are contained in the investors’ portfolios. Any investment information contained herein has been secured from sources that Yieldstreet believes are reliable, but we make no representations or warranties as to the accuracy of such information and accept no liability therefor.

Private placement investments are NOT bank deposits (and thus NOT insured by the FDIC or by any other federal governmental agency), are NOT guaranteed by Yieldstreet or any other party, and MAY lose value. Neither the Securities and Exchange Commission nor any federal or state securities commission or regulatory authority has recommended or approved any investment or the accuracy or completeness of any of the information or materials provided by or through the website. Investors must be able to afford the loss of their entire investment.

Investments in private placements are speculative and involve a high degree of risk and those investors who cannot afford to lose their entire investment should not invest. Additionally, investors may receive illiquid and/or restricted securities that may be subject to holding period requirements and/or liquidity concerns. Investments in private placements are highly illiquid and those investors who cannot hold an investment for the long term (at least 5-7 years) should not invest.

Alternative investments should only be part of your overall investment portfolio. Further, the alternative investment portion of your portfolio should include a balanced portfolio of different alternative investments.

Articles or information from third-party media outside of this domain may discuss Yieldstreet or relate to information contained herein, but Yieldstreet does not approve and is not responsible for such content. Hyperlinks to third-party sites, or reproduction of third-party articles, do not constitute an approval or endorsement by Yieldstreet of the linked or reproduced content.

Investing in securities (the "Securities") listed on Yieldstreet™ pose risks, including but not limited to credit risk, interest rate risk, and the risk of losing some or all of the money you invest. Before investing you should: (1) conduct your own investigation and analysis; (2) carefully consider the investment and all related charges, expenses, uncertainties and risks, including all uncertainties and risks described in offering materials; and (3) consult with your own investment, tax, financial and legal advisors. Such Securities are only suitable for accredited investors who understand and willing and able to accept the high risks associated with private investments.

Investing in private placements requires long-term commitments, the ability to afford to lose the entire investment, and low liquidity needs. This website provides preliminary and general information about the Securities and is intended for initial reference purposes only. It does not summarize or compile all the applicable information. This website does not constitute an offer to sell or buy any securities. No offer or sale of any Securities will occur without the delivery of confidential offering materials and related documents. This information contained herein is qualified by and subject to more detailed information in the applicable offering materials. Yieldstreet™ is not registered as a broker-dealer. Yieldstreet™ does not make any representation or warranty to any prospective investor regarding the legality of an investment in any Yieldstreet Securities.

Banking services are provided by Evolve Bank & Trust, Member FDIC.

Investment advisory services are provided by YieldStreet Management, LLC, an investment advisor registered with the Securities and Exchange Commission.