Time to invest in alternative assets? The pros aren't so sure

Published Mon, Jan 1 20246:34 PM EST

Amala Balakrishner @in/amala-balakrishner @_amalabk

From family offices to financial advisors and beyond , interest in alternative assets appears to be growing — but the pros appear mixed on whether retail investors should get invested. For Caesar Sengupta, CEO of financial services firm Arta Finance, there is "incredible value in private markets" and the assets shouldn't be overlooked. "Without a doubt, most investors should be looking beyond public market assets to alternatives, which are becoming much more accessible as investments," Sengupta from Arta Finance — which describes itself as a digital family office — told CNBC Pro. Alternative investments are assets that do not fall into the conventional categories of stocks, bonds, commodities and cash. Instead, they include the likes of real estate, private equity, venture capital, private debt, hedge funds, futures, cryptocurrencies — and even collectors' items like art, jewelry and watches. "If we look at how sophisticated investors — like family offices and large endowments — are dealing with markets, you will see that they have a much larger allocation towards private markets and alternative assets compared to the average investor," Sengupta said. For him, the benefit of investing in alternatives is two-fold: on the one hand, it increases an investor's level of diversification; on the other, the assets can be less volatile than public market instruments as they are not "strongly influenced by day-to-day developments." "Private market assets are often less correlated with public market assets which increases your diversification and reduces volatility," Sengupta, who was speaking on Nov. 30, said. Not everyone agrees, however. Robert Almeida, global investment strategist at MFS Investment Management, says that dabbling in alternative investments offers "fake diversification." "There's an implication in the industry, that private offers higher returns with more diversification — that just doesn't make sense. The implication is that private has higher returns with less volume and in turn [a] diversification benefit. But it's the return on the business and the volatility of those returns that determines its financial asset returns, not whether the business' financial securities are public or private," he said. Almeida's suggestion is to look at assets beyond the public and private classification and make investments based on their merits like the viability of the business and its return on capital, instead. That way, the returns - and valuations - that investors can enjoy would be much higher. 'Illiquidity premium' Higher inflation levels mean it has become easier for some retail investors to access alternative assets in recent years. In the U.S., people with an earned income of at least $200,000 a year (or $300,000 with a spouse) are deemed accredited investors who can invest directly in private credit or private debt — and these thresholds aren't indexed to inflation. However, alternative investments pose their own risks, especially for less sophisticated investors. For example, private investments may be required to publish fewer disclosures to investors. Alain Forclaz, deputy chief investment officer of multi-asset at Lombard Odier Investment Managers, highlighted several challenges with alternatives for retail investors. "Investing in private markets — unlike public markets — means you have an illiquidity premium because you lock your capital up for 5-10 years which forces you to have a long-term horizon," the portfolio manager added. Forclaz also said that alternative investments are just as sensitive to market cycles as more traditional asset classes, meaning they may not necessarily be an effective hedge to broader volatility. Steen Jakobsen, chief investment officer at Saxo, agrees, saying that retail investors need to err on the side of caution when dabbling in alternatives. "The yield of alternatives are correlated to the illiquidity of the assets, so the longer you go out on liquidity access, the more upside you can potentially have. But, I think you need to be more than a private retail investor to go into these — my advice is don't buy it, even if it's priced to perfection," he said, adding that he is bullish on fixed income and commodities for 2024. Adding alternatives to a portfolio For those interested in alternatives, the question arises of how to introduce them into a traditional portfolio mix. Data from Arta Finance indicates that a traditional portfolio of just stocks and bonds has annual returns of around 6.9%, on average. In contrast, returns are around 9.8% for portfolios that include alternative assets like private equity, private credit, and real estate. JP Morgan, meanwhile, found that tweaking a traditional portfolio mix to have 30% in alternatives, 40% in equities and 30% in fixed income boosted annualized returns from 8.4% to 9%, and significantly reduced volatility. While the amount allocated to each asset class is dependent on an individual's risk appetite and life stage, Sengupta said he wished he had created a portfolio mix in his 30s where investments to private markets were made over four or five tranches to eventually account for 20% of his investments. The rest of his portfolio would have been investments in equities and fixed income. "What that would have done is give me distributions, increase my cashflow and given me better diversification," he said.