Wouldn’t it be nice to know what financial experts are picking as the top alternative investments for 2017? After digging into that question, I discovered some very pleasant surprises, as well as a few “red alerts” that seem to be common among the experts’ predictions for the upcoming year.
What’s on 2017’s “Hot List” of Alternative Investments?
Perusing industry publications is a helpful way to see trends among alternative investment (AI) predictions. For 2017, which has started off with a strong, soaring stock market, you’d be forgiving for guessing that alternatives will not be popular between now and 2018.
I thought the same thing, and was glad to be proven wrong. It turns out that industry experts are saying 2017 could be very kind to investors in about a dozen categories of AIs, particularly some of the “old standbys” like precious metals and real estate.
The “Secret” Reason Behind the Predictions (It’s Psychology!)
Apparently, the fast start to the stock market this year has some major investors worried that maybe it’s climbed too high too fast. If the traditional stock and bond markets experience a full-blown downturn or even a significant pullback, that would bode well for most all alternative investments.
The interesting thing is the psychology of it all. The public tends to distrust a rising stock market, so even if there won’t be a downturn or crash, millions of investors expect one to happen. That perception is also good news for alternative investments because it means people will gravitate toward the non-traditional choices even if the stock market continues to rise unchecked.
The Alternative Investment “Lineup” for 2017
Whether the stock market does well or poorly, the alternative investments that are expected to perform strongly this year include: precious metals, private equity, cyber currencies, fine art, diamonds, distressed securities, film production, market-neutral funds and hedge funds.
For anyone interested in learning more about the AI landscape for 2017, I made a brief summary of descriptions for all the potential choices, along with the specific reasons they’re expected to do well over the next 6-12 months. At the end of the listing, I added a few reading suggestions for anyone who wants to delve into the world of alternative investing and find out what makes the AI market tick.
Before getting into the list, let’s take a look at the different categories of AIs, as well as some of the common advantages and disadvantages of this type of investing:
What are AIs?
There is no hard-and-fast definition of the term “alternative investment,” but dictionaries and business texts agree on a few common characteristics of these increasingly popular forms of wealth creation. It’s safe to say that anything that is NOT a stock, bond or cash is an alternative investment. The key aspect is the non-traditional component of the asset.
There is a bit (but only a bit) of controversy about whether to include real estate and forestry assets into the AI classification. Both have been around for centuries and are anything but “new” ways to make a profit. However, most business and economic textbooks note that these two methods of investing are new in at least one way: only recently have they been available to average investors through vehicles that allow for partial or unit ownership.
All of which means one thing: For our purposes, we can rely on the simple definition of AI as “not cash, not stocks and not bonds.”
Two Kinds of Alternative Investments
So, what exactly are the categories of alternative investments? Most experts divide the AI family into two general classifications. See the graphic below for a quick look at where your favorite is categorized. Note that because there are literally hundreds of different forms of AIs, the list only shows some of the more common investments in each category.
Examples of AIs in Each Classification
The list of alternative investment advantages grows every year. Once available only to well-heeled entrepreneurs, today’s versions of these popular portfolio-balancers include many low-cost options. Here’s a look at some of the main upsides of alternative investments in 2017.
Main Advantages of Alternative Investments
Potential Downside Factors
As with every other type of financial opportunity, alternative investments have their drawbacks, though all can be overcome with a sensible dose of due diligence and professional advice. More common problems are associated with liquidity and big price swings (volatility), while less-common problems are investment complexity and large maintenance/management fees.
Possible Drawbacks of Alternative Investments
Alternative Investments for 2017
Investors who seek out bonds, stocks and other instruments issued by corporations that are in dire financial straits must have a very high tolerance for risk. Compared to junk bonds, which are usually rated at BBB or worse by firms like Moody’s and Standard & Poor’s, so-called distressed paper is rated CCC or worse, making them among the riskiest of all corporate-backed securities.
It’s easy to find distressed paper by asking your broker, but be ready for a lecture or at least a mountain of reading. Finding distressed bonds and stocks issued by a company that has a chance of avoiding bankruptcy is a mixture of science and art. Remember that is the company does end up filing Chapter 7 or 11 of the Bankruptcy Code, you’ll likely take a back seat to other creditors. A Chapter 7 liquidates debt, so stock shares usually become worthless, while bond holders can get a percentage payout on the dollar. In a Chapter 11 reorganization, the company continues to live and often bounces back, making that distressed paper worth quite a lot.
The usual interest rate you want to look for on DP is 10 percent above prime, as a general rule. So when prime is 3, distressed securities will be paying about 13 percent. The DP arena is not for the faint of heart, so if you’re interested in this kind of investing, start out slow, do lots of research, and have a professional at hand.
As the U.S. economy bounces back from a difficult 2016, many firms that were headed toward bankruptcy are either expected to avoid it altogether or at least file for Chapter 11 rather than Chapter 7, which means the coming year could be a very good one for holders of distressed paper.
Film production for accredited and/or sophisticated investors has really taken off since 2010, as more and more funds get into what the industry calls “slate financing.” The most common way to get into this kind of activity is through a hedge fund that backs artistic projects like dance companies, galleries, and of course films. Some funds stay far away from film investing because it is considered a high-research niche, where expertise and long experience are called for.
There are no general guidelines as to rate of return in this new form of alternative investment, but successful film projects are able to pay backers exceedingly well. The downside is the exceptionally high risk. The public’s taste in film is impossible to gauge, so even a project with big-name talent behind it can flop. Likewise, small projects with unknown casts can technical crew can often hit a home run and deliver an ROI above all expectations.
For investors, the film niche calls for long hours of research, the guidance of a hedge fund with experience in the field, and a substantial entry investment. As with many other alternative forms of investing, film backing carries extremely high risk but the potential for outsized payoffs.
In 2017, with the traditional film industry stuck in a rut, some of the smaller, independent studios are looking to take up the slack. For that reason, a large number of films are currently looking for financial backing. So if nothing else, this year will offer more opportunities for film investors, and with initial investments in the $2,000-$10,000 range.
This is not the place to delve into the inner-workings of market-neutral funds because the mathematics is indeed daunting. But more and more investors are seeking out these funds through their brokers.
The downside of MN funds is the fee structure, which can be quite high due to the rapid turnover of securities. MNs attempt not to beat or even match the market, but to divorce themselves from it. These funds are typically made up of numerous long and short positions that are so designed to perform regardless of whether the general stock market goes up or down.
Just about anyone can get into a MN fund, but be sure to discuss the pros and cons with your financial advisor to make sure you don’t get eaten alive by high fees. In 2017, MN funds are gaining more media exposure and attracting significant attention from many people who had never even known they existed.
Not for everyone, market-neutral funds can be a good way to do better than “hedge” your bets in the marketplace. They can help investors shield themselves from the ups and downs of the traditional stock game and earn a nice return in the process.
As of mid-2017, the most popular kinds of investment-grade artworks are in the “contemporary” and “postwar” categories. Postwar refers to post-WWII. Contemporary art is usually defined as artworks that have been created by people who are still alive.
Those who want to see what’s available should spend time at sites like Art Space and visit any local galleries within driving distance. Ask gallery owners about auctions because most such events are not publicized outside the “magic circle” or the art investment world.
Collect or invest: For those who like art, there are few downsides to investing in this interesting, alternative niche. Experts suggest those new to the field should decide whether they want to be collectors or investors. In either case, one of the big advantages of art is that it appreciates in value without being in a vault or drawer: you can hang it right on the living room wall and make it a part of your life.
Entry price and holding time: Fine art is suited to long-term investing goals, which is a deal-breaker for some, but an attractive quality for others. There’s also the entry-price factor. For fine art, it’s not unusual for lesser known painters to sell their pieces at $1,000 or less. A typical example of a gifted “new” artist that many first-time investors consider is Nancy Bush. In the U.S. and Europe, there are similar artists like Bush, who regularly sell pieces in the $1,000 range.
Insurance and safety: Fine art must be insured and kept in a temperature-regulated environment, though many paintings are safe to hang anywhere in a typical home as long as they’re kept clean and undamaged. Theft insurance is another cost that investors need to factor into their financial plans.
Rates of return: Like collectible/classic cars and antiques, rates of return on fine art are hard to pin down. But all is not lost. According to BASI, for example, for the 50-year period leading up to 2013, the average rate of return on an art investment was 6.3 percent. The limitations of that statistic are obvious, based on such a long time frame as it is. But the BASI rate is something to start with.
Investors can find more specific data about their particular niche by watching art auctions all over the world. Usually, the most recent selling price for similar works by the same artist offers a reliable pricing tool for investors. The Internet is awash in art auction data, which means it is simple to follow current prices.
One problem that arises with unique, high-priced pieces is the lack of any auction activity. Investors have to wait, sometimes years, to see “similar works” go on the block.
Even after years of successful transactions, Bitcoin and other cyber-currencies are still not fully integrated into the “alternative investing” universe. One reason for this reluctance is the newness of the concept, the questionable anonymity behind its creation, and its recent price volatility.
Investors who are accustomed to the exciting world of alternative asset classes are turning to Bitcoin in greater numbers in 2017. There are distinct advantages and disadvantages to using cyber currency as an investment.
For investors who want to add Bitcoin to their alternative portfolio remember that all cyber-currencies are incredibly simple to transfer money anywhere and anytime via Bitcoin. Because there is no central banking authority, investors are in complete control of their funds at all times. Nor is there any concern about holidays, middlemen, international borders, or large fees. Bitcoin is a truly universal form of money, online and off.
Unlike credit card and PayPal-like transactions, Bitcoin exchanges require no personal information. This anonymity aspect is one of the biggest advantages of Bitcoin in the eyes of many. There is virtually no risk of identity theft from Bitcoin transactions as a result.
In fact, most Bitcoin transactions carry either very low fees or none at all. Even when merchants use digital currency exchanges, fees are much lower than those charged by banks, credit cards, and services like PayPal.
The simplest way to acquire Bitcoin is to visit an exchange information site. One of the largest is located at BuyBitcoinWorldwide, where investors and consumers can learn how to purchase Bitcoin using their credit cards, PayPal, a bank transfer or with a debit card. This site and others like it are a one-stop info center. Potential investors can read an intro about Bitcoin, choose an exchange, buy Bitcoin, learn how to avoid scams, and secure their Bitcoin via the use of a “wallet.”
Precious metals (primarily gold and silver):
The investment outlook for gold and silver is quite positive for 2017. An increasingly unstable stock market, both at home and abroad, could propel both precious metals into new price territory.
While gold and silver have been in a several-year slump, many analysts think current conditions are ripe for a turnaround.
The climate for PM investing is the best it’s been in a long time.
The balance of 2017 should be an ideal time to increase the amount of silver and gold in personal portfolios. Paper stocks in gold mines and ETFs of precious metals are as risky as any other traditional security in times of crisis; which is why it is best to hold physical metals in times of uncertainty. Overall volatility in global financial markets makes precious metals one of the best investment vehicles this year.
Peer-to-peer lending is one of the newest forms of alternative finance. As an investor, one stands to make money on a loan’s interest, while borrowers have the advantage on not going through the long process of applying via a bank.
The arena has changed, however, since its birth in the early 2000s. In 2009, lots of major institutional and corporate investors entered the P2P market and virtually changed the face of the sector overnight. To note but one example, Google, Inc. put $125 million into the P2P giant Lending Club.
Even so, there are still huge profits to be made by average-sized investors in the P2P marketplace. Before investing, it’s always good to know who the big players are and what the state of the market is. Here’s a quick rundown of the current top of the crop in the P2P lending space:
Lending Club has been around for nearly a decade now. In fact, it was one of the earliest entrants into the sector. Since 2007, the company has been virtually alone in leading the industry. They made history too, by becoming the very first online lending entity to achieve listing status on the New York Stock Exchange. To date, LC has issued nearly $10 billion in loans. Lending Club investors typically earn between 6 and 9 percent on their investments.
Prosper, one of Lending Club’s most formidable competitors, entered the P2P market as a major player one year before their chief competitor, Lending Club. Since 2006, Prosper has issued more than $3 billion in loans, making them significantly smaller than LC, but still a worthy competitor. Both companies are still in the infancy of their existence. Prosper continues to grow steadily in terms of loan value issued and offers about the same rate of return for investors as LC does, between 6 and 9 percent.
PayPal is even getting into the picture with a new app that allows people to facilitate the repayment of personal loans. It’s called PayPal.me, and it is intended to reduce the “awkwardness” inherent in many personal and family loans.
Diamonds are certainly the new kid on the block in the alternative investing world. Factors that have kept stones out of play in the past still exist, though not to as large an extent. Some experts think 2017 and 2018 will be breakout years for this form of investing.
Price Transparency: A gold or silver buyer merely looks up the daily spot price, adds in whatever premium the dealer charges, and that’s that.
With diamonds, things aren’t that simple. There is a pretty wide range of allowable prices for a given gemstone, according to industry standards. A 1RW (one-carat, round white stone) might sell for much more in New York than in Kansas City on a given day. However, the industry is working to narrow this range in an attempt to “make diamonds the new gold” and lure investors to the segment.
Liquidity: There is also the problem of liquidity in the diamond market. Residents of Toronto might be able to sell any number of 1RWs they own, due to an active local gem market. That might not be the case for an investor living in Wichita, Kansas, or other regions where diamond trading is still in its infancy. Again, diamond industry elites are working build networks of buyers and sellers both online and on the ground so that average-size gemstones can be traded as easily as gold and silver U.S. Eagles.
Standardization: On the brighter side, many of the drawbacks to diamond investing have been lessened in the past 15 years and it is getting easier to buy, sell and trade 1-carat white stones, the “gold ounce” of the diamond industry. There are many variables that dictate the price of each diamond, but the same can be said for fine wines, antiques, collectible cars and works of art.
Perhaps diamonds won’t ever achieve the level of liquidity and standardization of gold and silver, but the shiny, valuable stones are sure to become a major part of the alternative investment universe within a few years, and 2017 could be the year that standardization and wider markets help this new form of alternative investing take off.
Hedge fund investing is usually open only to accredited investors with more than $1 million of net worth or two successive years of income over $200,000. Rules for different funds vary, but the overall impact of the requirements excludes 95 percent of U.S. investors from hedge fund participation.
Fortunately, there are ways around these obstacles for individuals who want to take part in investment arrangements that some call “virtual hedge funds.” Federal laws about accredited investors form a decisive barrier to entry, but several options have sprung up that open the doors to all investors.
*Note that these options are not “hedge fund” investing, per se, in its strictest formulation, but they come extremely close to mimicking the returns of various funds.
Replicators: With a name eerily similar to a sci-fi action film, these funds also travel under a few other odd names, like “liquid beta” and “ETF hedge trackers.” Whatever their managers choose to call them, most are ETFs that simply use mathematical algorithms to backtest real hedge fund results and crack the code, so to speak, to find out what those top-level hedge funds are trading. Run of the mill ETFs employ this strategy all the time by simply trying to match the average returns of a particular market sector.
To view some recent data on a typical replicator fund, view the info at IQ Hedge Multi-Strategy Tracker ETF’s web page. It’s not the biggest, smallest or best-performing replicator, but is one of the most popular and well-respected ones in the market.
“Mutual fund hedge funds”: Because the so-called “pure” hedge funds have such strict entry barriers, and because so many people want to take part in the long/short strategies that hedge funds employ, several mutual fund managers have come up with a creature called a “lite hedge fund.”
It works like this: the mutual fund amasses its portfolio holdings in the same way that hedge managers do, by acquiring both long and short positions in a way that will shield the fund from a market downturn. (Note that this is similar to the methods used by everyday stock investors who “protect” their securities holdings with a 10 percent position in precious metals. When the stock market goes kaput, metals markets often surge. This offers a crude form of built-in insurance for a stock portfolio).
Investors who want to see what these imitative mutual funds look like can view a representative example at the factsheet page for Mainstay Marketfield’s long/short mutual fund.
“Follow-the-leader” analysis: This strategy of replicating hedge fund returns is by far the least expensive and most “do-it-yourself” of the methods available. Because large hedge funds must by law disclose a so-called “snapshot” of their major assets four times per year, copycat investors merely examine the disclosure statements of a dozen or so huge hedge funds. That way, one can get a decent idea of what the big boys are buying and selling, and which industry sectors are probably going to heat up or cool down.
There are many free online services to help copycat investors see what the big funds are doing. One representative site is Insider Monkey, which offers a broad look at the mega-funds along with analysis of what’s hot and cold in the world of hedge funds.
Not only will the large funds continue to increase in size, but many of the newer players will become mid-sized funds and make way for even fresher faces, smaller firms and eager investors.
One of the most interesting developments in recent hedge fund history has been the success of so-called “replication” firms (described in more detail above). These alternatives to old-school hedge funds use a mixture of mutual fund and hedge fund strategies, are leaner, have much lower overhead, and base investment decisions on quantitative analysis almost exclusively.
For more information: Investopedia has an excellent guide on its main website which explains how hedge funds work, what terminology consumers should know, the history of the funds, and how to build a hedge fund strategy.
For investors who want a quick list of the world’s largest hedge funds, ranked by the size of each fund’s asset pool, see this “List of Hedge Funds.”
The Alternative Universe
Don’t forget to let us know what you think about 2017’s hottest alternative investments. Feel free to post a comment below or leave feedback on our Facebook page. We always appreciate readers’ thoughts and opinions. A healthy exchange of information makes us all better investors.
Please note: The information presented above should not be taken as “investment advice” or any type of inducement to purchase specific securities. It is merely our take on the current state of the market and is intended purely for informational purposes.