Alternative Investing 101

Posted by Craig Burrows

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craigburrowsThe last month saw a 12% drop in the TSX and volatility has many investors worried about the next 12 months. When you add potential inflation jitters, is the 60/40 equity / bond split still relevant? I would say that investing like it was the 1970s or 80s is like bringing a knife to a gun fight.

But before we finally scare you into cash and low producing GICs, is there another alternative?

There was a great commercial regarding men’s suits and the owner (Sy Syms) would say that “an educated consumer is our best customer”. At TriView, our goal is to educate investors and provide value-added strategies for the Money Talks audience. Over the next four weeks we offer a strategy for retail investors to learn about investing in alternative and private equity investments:

  • What are Alternative Investments?
  • The Risks of Alternative Investments
  • Current trends towards Alternative Investments & Regulatory Changes
  • Why and how to add Alternative Investments to your portfolio?


In last week’s article I explained why I couldn’t invest like my grandfather did in the 1970s or 80s. In this article I want to give you an understanding of what alternative investments are available to reduce public market volatility and inflation concerns. Alternative investments generally have these following characteristics:

–          They tend not to have a correlation to traditional investments like public stocks or bonds which allows them to act as a hedge to public market volatility or inflation.

–          They are rarely traded in the public markets and even rarer to be offered to retail investors due to their complexity and fewer regulatory hurdles compared to traditional investments.

–          They tend to be illiquid securities that tend to have set exits with little ability to sell before the exit term.

–          They tend not to have a secondary market for resale or have restricted sale covenants from the issuer.

–          Most financial advisers do not recommend them to investors due to their own lack of knowledge – which is why they tend to stick to stocks, bonds, mutual funds, ETFs and GICs

There are three main areas to alternative investments that are available to retail investors:

  • Real Estate
  • Private Equity
  • Commodities

Real Estate: More people have made money in real estate than any other kind of investment so why don’t more advisors recommend real estate in their portfolio mix? As most people have owned a home or rented an apartment, investors can generally understand the basics of real estate. It’s interesting that most people would have no problem leveraging a real estate investment with a mortgage. But try to explain a public market strategy of shorting or margining and their eyes glaze over!

Real estate has a low correlation to the stock market, but has a positive correlation to inflation to protect against inflationary erosion. Owning real estate requires significant management and therefore most people prefer to only own their primary residence and perhaps a secondary property. Since most people’s money is in their primary residence, financial advisors may recommend not to add real estate to their portfolio to provide diversity.

If you decide to invest in real estate beyond your home, here are a couple of common scenarios:

Public REITs: these are publicly traded Real Estate Income Trusts (REITs) that invest in specific or multiple sectors like commercial, industrial and residential. They provide some tax efficiencies and the units are normally liquid and generally move with the public markets which generally makes them more volatile than private real estate offerings.

Private REITs: Similar to public REITs except they are not as volatile as their public cousins but are generally not as liquid.

GP/LP Model: This model is generally used for high net worth investors that invest in a specific property and the LP investors (Limited Partners) have limited liability if the development needs more cash and exposure is generally limited to the amount they have invested. This structure has tax efficiencies as well.

MFT: Mutual Fund Trust is set up for investors that would like to invest in real estate through their registered funds. MFTs can invest in single investments or perhaps private REITs

Private Equity: There has become a greater demand for private equity offerings. Traditional investors in private equity were friends and family, angel investors and venture capitalists. Generally these companies were start-ups with huge risks and huge rewards. Most would fail which made it a product for “not the faint of heart”.

Private equity has changed dramatically in the past 15 years as more companies choose to raise capital privately than through public markets. The days of the great “IPO” are over for many entrepreneurs as companies who tend to have market capitalization of less than $500 million tend to be “orphaned stocks” due to lack of volume trading of their stock.

Today they are many quality businesses with strong track records and cash flow that need capital to grow their business and seek private markets for LBOs (leveraged buyouts), MBOs (management buyouts) and mezzanine capital (short term loans) to grow their business and keep themselves private. The negative of private securities is their illiquidity, long term holds of 5 – 10 years and risk of default. That being said, with many baby boomers looking to retire there is an opportunity to buy these highly profitable companies or even invest through your registered funds.

Commodities: For those who like “hard assets” like gold, silver or diamonds, one can invest directly into these assets and hold them in funds or actually take possession of them physically. Most people prefer to buy commodities by owning public securities that are in the mining or resource sector. People who invest in commodities are generally looking for protection against inflation and the volatility of currency fluctuations or buy resources if they feel that the global economy is growing and needs resources to bring products to market (cars, food, etc). Commodities do have a potential flaw as they are volatile to price swings based on the markets’ mood.

I won’t delve into Hedge Funds or Structured Products as they tend to be for institutional investors.

In next week’s article I will cover the risks of Alternative Investments. and remember, before making any investment in public, private or alternative investments, learn the pros and cons – and if it is too good to be true or difficult to understand, DON’T INVEST!