The “Alts” are Everywhere!

By Ben Dolan, CFP®

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Alternative investments are all the rage (or as my teenage son and daughter might say, they are “fire”…or is it “lit”?). Lately, it seems like every other article I read in the financial press has been about “alts,” but that’s anecdotal. What’s not anecdotal is the number of phone calls I’m getting to offer DCA with alternative investments that we can, in turn, offer our clients. I used to get these calls monthly, but now it’s weekly, sometimes daily.

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Solicitors of alts are hard at work in Washington DC too, as noted by Jason Zweig in his July 25^th article for the Wall Street Journal: “Money managers are in a desperate race to stuff illiquid, so-called private-market assets into funds anyone can buy, including your 401(k). They say we all can earn high return and low risk with nontraded “alternatives” like private equity, venture capital and private real estate.”

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In theory, I’m not against investment in alternatives. Whether I’m buying a car or out to dinner, I like having a lot of options to weigh. The same goes for when I invest. Alts provide a lot of choices, from private debt, to crypto, to private equity.

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In practice, I like to be very well informed before I make an investment decision. In the chance that you, like me, are getting bombarded with the pros of various alt strategies (and like to be informed), you’ll want to carefully consider the cons of these investments as well:

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• Illiquidity: Many alternative investments are not easily sold or converted to cash.
• Higher Fees: These investments frequently incur higher management and performance fees than traditional assets, significantly eroding returns.
• Complexity and Lack of Transparency: Alternatives often have complicated structures, making it difficult for investors to fully understand risk and performance.
• Risk of Significant Losses: Background risks are often higher, especially in private markets or speculative assets.
• Accessibility and Regulatory Gaps: Many require high minimum investments and are less regulated, potentially exposing investors to fraud or mismanagement.
• Tax Treatment: Tax implications for alternatives may be more complex and vary based on asset type.

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This list is not exhaustive. Perhaps the most dangerous con of many alternative investments is valuation (ie what the asset is worth). Unlike public stock markets, private investments don’t have millions of participants offering to buy and sell the underlying assets based on their determination of value. Zweig explains: “Because private assets don’t trade, it’s the fund managers—not the market—that determine what they’re worth. That enables the managers to report much fewer and lower fluctuations than public funds do. Then they get to declare that private funds are low risk.”

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If you’re considering alts, be sure to have your questions ready. When all your questions are answered, come up with a new list of questions, even if they are the same questions as before asked in a slightly different way. Use the list of cons above to guide your questions. Ask for as much documentation as possible about the offering and the regulatory environment about the asset/fund.

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When you feel informed about the offering, ask yourself an important question: how does this opportunity compare to all the other opportunities available to me?