It has been an exciting start to the investing year. Between the Dow Jones flirting with 20,000 points, a major milestone, and financials finally getting back to levels we haven't see for years, investors are sighing with relief. Last year, we saw a major uptick in savvy investors seeking higher returns in other markets due to a choppy fiscal environment and political insecurity. However, it seems like markets are collectively turning the page to a new chapter of investing in 2017. While HNWIs may have been pushed to access alpha elsewhere in 2016 due to market uncertainty, these individuals will likely stick to those alternative investments because they've experienced some of the highest gains they've experienced in years.
Portfolio allocations to alternative investments have been on the rise for several years now - McKinsey noted the trend back in 2012 - and they're expected to continue growing rapidly. PwC projects investor allocation to alternatives will grow nearly 10% a year for the next five years, reaching $13 trillion in volume by 2020. The growth in alternative investment mutual funds over the past couple of years proves that even retail investors are catching on. By mid 2014, the category boasted $300 billion in assets, and had seen $35.7 billion in growth in the first half of the year, according to InvestmentNews.
Here are our top 3 reasons:
1. IPOs are taking longer
The number of billion-dollar companies that are still private hit a record, according to a report by Bain and Company. Going public is an expensive and time-consuming process for a new business, one that requires a company to jump through many regulatory hoops. Yes, there have been some big, splashy tech IPOs in 2014, but many of these companies are what Aileen Lee of Cowboy Ventures calls "unicorns" - firms founded after 2003 that are now worth at least $1 billion. To capture outsize returns, you have to invest in these companies while they're still private.
2. Investors need more diversification
Years of increasing volatility in public equities and shrinking yield on bonds have caused investors to look more seriously at alternative asset classes. Affluent investors need diversification - and they expect their advisors to guide them beyond just a mix of stocks and bonds. Simple asset class and international diversification just doesn't cut it anymore. These days, when Greece sneezes, markets around the world catch a cold. Wealthy investors looking for real protection from market swings need alternatives.
3. Investors are looking for non-correlation
Demographic changes also play a role here. As investors age, they need more protection from downturns. Today's retirees or near-retirees have the global financial crisis of 2008 fresh in their minds. Many retreated to bonds and now face low yields and real risks to principal if interest rates increase. They know they need some assets in their portfolios that are truly uncorrelated with interest rates and the stock market, so they don't lose their nest eggs just when they're ready to crack them open. Alternative investments - particularly liquid alternatives - may be just the ticket for this group.
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