Why Alternatives?

November 5, 20205 min read
Share on facebookShare on TwitterShare on Linkedin
feature-image-why-alternatives

Yieldstreet’s offerings fit into the broad rubric of alternative investments. You probably already know alternatives are distinct from traditional investments like cash, stocks, and bonds. From there, though, the story gets more complicated—and more interesting. Alternatives typically have low correlation with traditional asset classes, potentially creating downside protection in times of market stress. And some alternatives provide the possibility of additional portfolio income—an attractive attribute in low-interest rate environments like the one we’re experiencing today.

What are Alternatives?

Investors divide the world into asset classes. An asset class is a group of investments that tends to move together, but has distinct characteristics from other investment types. Traditional asset classes include stocks, bonds, and cash. These three asset classes have a few common features: you can see their prices quoted daily, they’re broadly accessible, and their markets are heavily regulated, producing a lot of public information about their risks and opportunities. Because prices and fundamental information about these investments are available to so many investors, the markets for traditional asset classes tend to be efficient, meaning their prices tend to reflect their underlying value. This can make it difficult to find bargains among traditional asset classes.

A number of very different asset classes fall into the category of alternatives. Examples include:

  • Real Estate Debt 
  • Real Estate Equity
  • Private Equity
  • Hedge funds
  • Private Debt (art, consumer, litigation, marine, etc.)
  • Commodities (Gold, crude oil, agricultural commodities, etc.)

Each alternative asset class behaves differently in different economic environments. And within each asset class, there are smaller categories. For example, many Yieldstreet investments fall under the Real Estate Debt and Private Debt segments. Its Private Debt investments are mainly backed by real estate assets, but Yieldstreet also offers debt investments backed by art, marine, and other assets. 

While each type of alternative investment has unique qualities, they all have one thing in common: They tend to respond to economic conditions in ways that are distinct from stocks and bonds. Alternatives tend to represent areas of the global economy that stocks and bonds may not cover. This gives alternatives potentially powerful diversification characteristics that may help investors manage downside risk.

Asset class diversification

Traditional guidance suggests that investors should diversify among different asset classes. Going from all stocks to a blend of stocks and bonds can help to diversify risk. Going from all stocks and bonds to stocks, bonds, and alternatives creates additional diversity. Since no one can pick which asset class might perform best going forward, it’s often recommended to hold a variety of asset classes to prepare for a variety of future possibilities. 

The table below illustrates: for the past seven years, an all-stock portfolio would have performed the best. But in the seven years before that, an all-stocks portfolio would have performed the worst.  


returns-2005-2012-why-alternatives

returns-2013-2020-why-alternatives

Keep in mind: stocks have been on an incredible bull run since the Financial Crisis of 2008. The rally has been largely concentrated in a handful of giant tech companies, and volatility has risen in the past year, so there may be some reason for investors to be cautious about stocks going forward. And it’s when stocks and bonds deliver poorer returns that alternatives tend to be helpful. That dynamic is clearest when looking at portfolio downside. In the financial crisis of 2008 and in the COVID correction of 2020, a portfolio of stocks, bonds, and alternatives helped buffer against downside risk.

why-alternatives-chart-3

Some Alternatives drive income

While traditional stock-and-bond diversification has historically done the heavy lifting in terms of protecting portfolios on the downside, investors should consider that today’s low interest rate environment may make it difficult for investors to capture attractive long-run returns by allocating to traditional bonds.

Alternative income investments like those available on Yieldstreet can help investors on two fronts: first, they provide the possibility of additional diversification beyond what’s available to traditional stock-and-bond investors. Second, Yieldstreet’s investments target higher rates of return than what can typically be found in the investment-grade bond market. Yieldstreet has typically targeted yields in the 7% to 15% range. Lack of liquidity and smaller deal sizes in the private debt market usually translate into higher returns but could also mean that there are less pairs of eyes scrutinizing private debt deals, and investors may want to conduct more due diligence on their own to find attractive and appropriate opportunities—there’s no free lunch in investing. (On the flip side, because fewer investors are evaluating these opportunities, there may be more opportunities to find bargains.) For investors who are looking for additional ways to pursue higher investment returns while potentially reducing their portfolio’s exposure to stock market risk, Yieldstreet’s offerings may be attractive.

How much to allocate to Alternatives

Every investor has a distinct time horizon, need for liquidity, ability and willingness to take risk, and return objective. The right allocation to alternatives depends on these and other personal factors; there’s no one-size-fits-all optimal allocation. For investors who believe alternative strategies are suitable, a common rule of thumb is to allocate between 10% and 25% of a portfolio to alternatives. A smaller allocation may not create noticeable improvements, and a larger one risks tilting the portfolio away from traditional asset classes, which have a strong long-term track record of growing along with the overall economy and typically form the core of many investors’ portfolios. 

Regardless, investors who have enjoyed strong returns in the stock market in recent years may want to consider “rebalancing” their portfolios into alternative strategies. With interest rates near historic lows, stock valuations running high, and a global pandemic creating a high degree of uncertainty, alternatives may represent an attractive risk-reward proposition for investors who desire income but are concerned about taking additional stock market risk.If you have additional questions regarding Yieldstreet or offerings on our platform, please email us at [email protected].

This communication and the information contained in this article are provided for general informational purposes only and should neither be construed nor 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. Any link to a third-party website (or article contained therein) is not an endorsement, authorization or representation of our affiliation with that third party (or article). We do not exercise control over third-party websites, and we are not responsible or liable for the accuracy, legality, appropriateness or any other aspect of such website (or article contained therein).