Anyone who has read our literature knows one of our pet peeves: calling real estate, private equity, and private debt “alternative asset classes.” Alternative to what? We think an asset earns that label only if its returns come from a different source than stocks and bonds.
Moving an asset from public markets to private one’s changes how it is priced and what it costs but it doesn’t change what drives its returns. When the economy contracts, equity loses value whether it trades on an exchange or sits inside a private fund. When interest rates rise, debt loses value whether it is a Treasury bond or a direct loan. The private version usually comes with higher fees and less frequent pricing. Infrequent pricing can also make an investment look steadier than it really is.
For several years, AFE has looked for investments whose returns depend on something other than the business cycle. Catastrophe bonds pay investors to take on the risk of hurricanes, earthquakes, and other natural disasters, so their results depend on physical events that occur independently of the economy. Music royalties generate income each time a song is streamed, purchased, or licensed. Litigation finance funds legal claims in exchange for a share of the settlement or judgment, so its results hinge on how individual cases resolve.
The obstacle to providing clients with maximum diversification and thus limited volatility has been the minimums. Many of these funds require $1mm or more per investment, which made a diversified allocation impractical for clients with less than about $10 million. A new relationship now lets us build a diversified alternatives allocation starting at $1 million.
For clients approaching retirement, income that does not depend on stock or bond markets can be a valuable part of a plan. We encourage anyone looking for low vol income to reach out and learn more about our strategy.