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The 4 Most Important Factors When Building an Alternative Investment Portfolio

December 22, 2022

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An Alternative investment portfolio used to be rare outside of those of the very wealthy, family offices, and large pension funds. However, as more people begin to understand the unique benefits alternative assets bring to their investment strategy, their popularity is skyrocketing.

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According to NASDAQ, alternative investments under management are expected to reach $17.2 trillion by 2025; a fourfold increase since 2010.

This blog post will cover the top 4 most important things to keep in mind when constructing your own alternatives portfolio to help you get the best possible results.

1. Understanding Cash Flow

Cashflows in the private market can be hard to predict, which can cause problems for investors with limited risk and liquidity.

Assets like baseball cards or fine art take time to sell and release your capital. This remains true even for tokenized assets. Make sure you have a firm understanding of any limits or minimums placed on when you can sell, and how long the full process will take before you can access your capital.

2. Due Diligence

A pile of hundred dollar bills
Be realistic about your cash flow needs. Photo by Jonathan Borba on Unsplash

Alternative investments must be carefully chosen and put through appropriate and rigorous due diligence steps.

The recent crypto/FTX scandal has rightly placed investors on high alert for scams and risks of fraud.

Fraudsters target asset classes that are more complicated, seeking to take advantage of the gaps in investors’ understanding.

Choose to invest with companies who have a strong track record, high transparency, and who put in the leg work to make sure you understand and feel comfortable with where your money is going.

3. Timing

Alternative assets tend to perform best when held for multiple years. Like all investing, it’s a long-term process and you are best off entering the alts space recognizing that you are playing a 5-10 year+ game.

We refer to the adage that it’s time in the market, not timing the market. Those who maintain a well-diversified portfolio over the ups and downs of bull and bear markets consistently outperform those who try and capitalize on momentary peaks and troughs.

Patience is key. According to Forbes, “Investors should understand that this is a long-term strategy that requires planning and discipline.”

Playing the long game also gives you time to capitalize on the effects of compound interest, supercharging your ROI.

4. Portfolio Balance

Due diligence is vital when investing in alternative assets.
Both timing and due diligence are vital for a strong alts portfolio. Photo by Trent Erwin on Unsplash

Keeping an eye on overall allocation and risk profile is a sound approach for any investment strategy, and applies just as crucially to building a powerful alternative asset portfolio.

Quality professional alternative assets platforms will help you to understand what your risk appetite is and how to allocate your capital accordingly. This will likely involve a mixture of investing:

  • over time
  • in different geographical regions
  • In different industries
  • in various markets

You might hear this referred to as ‘vintage investing’ or ‘vintage diversification’. It is a phrase drawn from the collectible wines space and refers to buying up assets from multiple different years to hedge your bets against one particular vintage being very good or very bad.

Like wines, all assets will have high and low return years. Diversification is the core strategy that will minimize the potential harm of these fluctuations.

Just as important for your portfolio balance is having an annual pacing plan that shows what new funds need to be committed in order to reach or keep the target allocation. A strategic yearly review determines what fresh financial commitments are needed to achieve or maintain the goal allocation.

In summary

Alternative assets bring with them a wealth of unique benefits that can bolster your overall investment strategy and supercharge your lifetime ROI. With some careful thought and the right support, you can profit from those benefits too.

Want to get started? We will walk you through it step by step here.

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