How we find differentiation and value in an unpredictable market.
Exploring Alternative Investing Means Finding The Genuine Alternative
Traditional Alternative Investments include asset classes such as private equity, venture capital, hedge funds, and real estate. They are believed to behave differently than conventional investments, so adding them to a portfolio can add balance and diversity – theoretically improving returns and reducing risk.
The challenge with these ‘traditional’ Alternatives is that in reality, they often continue to correlate to the general market, albeit sometimes with a lag effect due to lower price discovery. Hedge Funds are generally just de-levered market exposure, larger Private Equity has high market correlation, albeit with a lag, and Venture Capital generally has both a lag and levered exposure.
Genuine Alternatives Can Offer Reduced Risk
At Heirloom, we specialise in Alternative Investments, but not the usual suspects. Our expertise lies in identifying differentiated investments aimed at reducing portfolio volatility and risk. This includes investments in areas undergoing a structural change or dislocation, and in particular opportunities that require operational effort to implement that are not large enough to attract the attention of large investment managers.
Most of these investments exhibit low correlation to the economy and to any other asset classes, and are designed to perform in most market conditions. We believe that truly alternative assets should exhibit low correlation with the rest of a traditional portfolio, which is necessary for them to genuinely function as a ‘diversifier’ and ‘market risk reducer’.
Here are some examples of niche assets that have little or no correlation to the general market:
Legal Finance
We believe financing specific litigation claims offers an uncorrelated investment that is more insulated from the global economy; lawsuits and settlements happen regardless of whether the economy is booming or in a recession.
Asset-backed Lending
We believe hard assets such as agricultural land or commodities in transit offer low risk due to their covered structures (in the event of a default an investor can take possession and sell the asset).
Equipment Leasing
We believe owning hard assets such as rail cars, helicopters and dry bulk maritime vessels and leasing them out to strong counterparties provides both asset-protection and strong cash flow.
Structured Equity
Financing the share and option holders of later-stage growth companies that need liquidity either for personal use or to pay the tax on their option grants can provide a more secure method of growth funding, with a shorter timeframe to more established and reliable growth companies.
So How Do You Access Genuine Alternatives?
The challenge with Genuine Alternatives is that they are often more difficult to access, are generally smaller at the earlier stages where we become involved, and often require substantial effort to compile and implement. This means that the big asset management houses do not tend to offer these assets until they are well developed enough that they can acquire them in scale and standardized format. In turn, they are often unavailable to individual families or investors.
That is, until Heirloom was created in 2015 to offer other family offices and ultra-high net worth investors access to the niche, truly Alternative Investments that it preferred for its own investment portfolio.
Investments in alternative investments are speculative and involve a high degree of risk and those investors who cannot afford to lose their entire investment should not invest. Additionally, investors may receive illiquid and/or restricted securities that may be subject to holding period requirements and/or liquidity concerns. Investments in private placements are highly illiquid and those investors who cannot hold an investment for the long term (at least 5-7 years) should not invest. Alternative investments should only be part of your overall investment portfolio. Further, the alternative investment portion of your portfolio should include a balanced portfolio of different alternative investments.