In my previous post “Alternative Investments: How Less is More” the reasons to more broadly diversify a portfolio and the potential benefits of reduced volatility of alternative investments benefits investors significantly. While the benefits are many of alternative investments, extra care in the identification and selection of nontraditional, commonly known as alternative investments, is warranted. While careful due diligence is required for all investing choices, alternative investment choices offer investment structures that are very different than a more well-known mutual fund or ETF. As a firm, we do have a bias towards non-mutual fund/ETF options and in my next article “Pick your Poison: Liquidity or Volatility” will go into more depth and detail.Alt, Alternative, Investments, Investing

It goes without saying that financial records need to be reviewed and ascertain if they make sense, yet, there are other factors that need to be considered. White Oaks follows 7 principles in considering investments in the non-traditional space. They are:

  1. Does this alternative investment operate in a specific niche that is inefficient?
  2. Does the strategy have broad-based diversification or is it in a single or limited number of choices?
  3. Do the principles of the alternative strategy exhibit sound business practices and solid personal character?
  4. Has the concept been tested over time?
  5. Who are the strategy’s service providers?
  6. Does the strategy add value to the portfolio?
  7. Are the fees for the strategy reasonable?

Let’s dig a little deeper.

  1. Does this investment operate in a specific niche that is inefficient?

Let’s face it, there are many investment opportunities that claim to be alternative investments that, in reality, are an equity fund with a trading strategy. Our best ideas have come from ideas that exploit a unique opportunity or niche in the marketplace. Some operate in the direct lending world, others in real estate and so on. Our best ideas have come from simple solutions to a problem that someone has figured out how to solve profitably and provide equity type returns with lower volatility. 

  1. Does the strategy have broad-based diversification or is it a single or a limited number of choices?

We have invested in both types where the investment within a strategy is a single of 3 or 4 investments. Over time we have preferred a broader spectrum of investments. In one, we participate in hundreds of separate investments in a theme. In those, if a couple do go bad, no big deal. With only one or a few, it is a big deal.

  1. Do the principles of the strategy exhibit sound business practices and solid personal character?

Clearly, this is a qualitative judgment based on personal business experience and confidence in judging a person’s character. While not perfect, ones “gut” often tells you what to do. If one does not have that confidence it is wise to engage with a professional or someone else whose judgment you trust.

  1. Has the concept been tested over time?

Personally, we never heard a bad idea. After all, who would spend money to tell you about a bad investment, right? For every investment pitch, one needs to consider what the other side of that story might be. Consider all sides of the idea and ask lots of questions. For every 100 ideas that are pitched to us, we pick one.

  1. Who are the strategy’s service providers?

At the base of this principle is the old saying, you are known by the company you keep. Alternative investments usually have an administrator, auditor, legal counsel and tax counsel. It is very appropriate to ask who those firms are. We take comfort in service-providing firms that have size and a good reputation. Remember, Bernie Madoff’s auditor was a one-man show. Big service providers do not want their reputation sullied or to be sued for malfeasance. Knowing who they are and their reputation is important.

  1. Does the strategy add value to the portfolio?

If an idea does not add value to a portfolio why have it? In “Alternative Investments: How Less is More” the notion of diversification was amplified to be more important than returns. Does the investment have a low correlation to other parts of your portfolio? Will it enhance the portfolio by lowering risk?  If not, why have it?

  1. Are the fees for the strategy reasonable?

Of course, fees are a drag on investment performance. The burden of proof is on the strategy to justify its costs. Yet, it would be silly to ignore the possibility that a strategy cannot earn its fees, especially when operating in an inefficient investment climate. While public equities and parts of the fixed income market have become more efficient, if one is investing in inefficient markets, and there are many, look for the proof the fee is justified.

The nontraditional investment world can offer many benefits to reduce volatility and deliver reasonable returns. With some investigation and following the 7 principles, an investor can go a long way in meeting their objectives.

The foregoing content reflects the opinions of Wealth Oaks Wealth Advisors, Inc. and is subject to change at any time without notice. Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct.

Past performance may not be indicative of future results. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses which would reduce returns.

All investing involves risk, including the potential for loss of principal. There is no guarantee that any investment plan or strategy will be successful.