Alternative Investments:

NOTE: The endnotes listed below will need to be listed on the video at the time those data points are mentioned.

Beginning of video Disclaimers: Alternative investments, such as hedge funds, private capital/private debt funds and private real estate funds, are not suitable for all investors and are only open to “accredited” or “qualified” investors within the meaning of the U.S. securities laws. They are speculative, highly illiquid, and are designed for long-term investment, and not as trading vehicles. There is no assurance that any investment strategy will be successful or that the strategy will achieve its intended objective. Investments in these strategies entail significant risks, volatility and capital loss including the loss of the entire amount invested. They are intended for qualified, financially sophisticated investors who can bear the risks associated with these investments. Investors should read the offering documents prior to investing.

Beginning: Hi everyone, welcome to another edition of the CG Education Series.  Today we’re talking about: Alternative Investments What are they, how do they work and what’s different about them?  These types of investments include:

- Private Equity/Capital

- Private Real Estate

- Private Debt (Bonds)

- Hedge Funds

- Commodities

- Currencies

You’ll notice some of these you may already have like Private Real Estate. Think of an investment property, commercial building or your home.  As part of the Insight FORMula and our total-picture approach, all of your assets have a place in your financial picture.  We approach alternatives like we do all investments: there is no one-size-fits all solution, it has to fit within your specific goals and objectives.

While the markets have come a long way since 2008, we feel there aren’t yet many signs of the economy taking a big downturn. However, it may be a great time to lock in profits, for not if but when markets get volatile and when inevitably the economy slows down. Take Hedge Funds for example: you can think of them pretty literally as a “hedge” against a large drop in the markets.  Historically they’ve only captured about 19% or ~1/5th of that downside. That makes a big difference in times like 2000 or 2008; but the flip side is they only capture about 52% of the upside.   So again, not a panacea, but can be an important piece to a portfolio.

Another example is Private Equity and Private Debt.  The number of publically traded U.S. companies has dropped nearly 50% from the peak in 1996 at 8,000 companies to ~4,000 at the end of 2017.  Yet there are approximately 6 million private companies (by comparison) in the U.S. alone; about 1/3rd of which have more than 100 employees.   That’s a much bigger market to invest in and is more accessible now than ever before.  Another example: Private debt, behaves much differently than bonds in the public markets like Treasuries and even Corporate Bonds. Because Private Debt managers don’t have to (necessarily) track an index, they can be much more thoughtful and deliberate in the bonds they choose to invest in.  In some cases the risk exposure is actually less than what’s available in a regular bond-fund for example.  

At the end of the day, none of these examples should be considered an end-all-be-all, just more tools and choices for portfolio protection and returns.  To smooth out the bumps and keep the returns competitive and in-line with your goals.  We want to invest in the best and most innovative companies in the world; Alternative Investments may be a way to give us more choices to do just that.


End of Video Disclaimers:

Wells Fargo Advisors is not a legal or tax advisor. Private capital funds are not suitable for all investors and are generally open to qualified investors only. They are subject to market, funding, liquidity, capital and other material risks. They use complex trading strategies, including hedging and leveraging through derivatives and short selling and other speculative investment practices. The performance and volatility of a private capital fund will be materially different from the performance of a traditional portfolio. There is often limited (or even non‐existent) liquidity. They do not represent a complete investment program. Private capital investments often demand long holding periods to allow for a turnaround and exit strategy. There is no assurance a secondary market will exist for interests and there may be restrictions on transferring such interests. Private capital funds involve other material risks including capital loss and the loss of the entire amount invested.

Investment in real estate securities include risks, such as the possible illiquidity of the underlying properties, credit risk, interest rate fluctuations, and the impact of varied economic conditions.

Core investments in real estate are considered less risky and are characterized as having lower risk and lower return potential.  There is no guarantee any investment strategy will be successful under all market conditions.  The value of any property may decline as a result of a downturn in the property market, and economic and market conditions. The value-added strategy seeks to add value by making enhancements to properties.  These properties may have operational issues and usually require additional leverage to acquire.  There is no guarantee value appreciation will be achieved and the operating company may be forced to sell properties at a lower price than anticipated. An opportunistic investment style bears the highest level of risk among real estate strategies as it typically involve a significant amount of “value creation” through the development of underperforming properties in less competitive markets or other properties with unsustainable capital structures.  Although these investments have the potential to generate income, there is no guarantee they will do so over their investment time periods.  In addition, private real estate is considered illiquid, there is no assurance a secondary market will exist and there may be restrictions on transferring interests.  Since the opportunistic properties have little to no cash flows at time of acquisition, higher leverage is often employed and sponsors may be subject to less favorable debt terms and higher interest rates than more stabilized properties.  All investments may be negatively impacted by varied economic and market condition which may be unpredictable. 

There are risks particular to investments in commercial real estate securities as well as in direct real estate investments, including, without limitation, changes in property values or revenues due to oversupply, changes in tax laws and interest rates, environmental issues and declining rents. No assurance can be given that the investment objectives described herein will be achieved and investment results may vary substantially on a quarterly, annual or other periodic basis. The funds engage in leveraging and other speculative investment practices that may increase the risk of investment loss. The funds may invest in derivative instruments, which may be more volatile and less liquid, increasing the risk of loss when compared to traditional securities.

Hedge funds trade in diverse complex strategies that are affected in different ways and at different times by changing market conditions.  Strategies may, at times, be out of market favor for considerable periods which can result in adverse consequences for the investor and the fund.  There is no guarantee any hedging strategy will be successful or not incur loss.  Hedge fund strategies, such as Equity Hedge, Event Driven, Macro and Relative Value, may expose investors to the risks associated with the use of short selling, leverage, derivatives and arbitrage methodologies. Short sales involve leverage and theoretically unlimited loss potential since the market price of securities sold short may continuously increase. The use of leverage in a portfolio varies by strategy. Leverage can significantly increase return potential but create greater risk of loss.  Derivatives generally have implied leverage which can magnify volatility and may entail other risks such as market, interest rate, credit, counterparty and management risks.  Arbitrage strategies expose a fund to the risk that the anticipated arbitrage opportunities will not develop as anticipated, resulting in potentially reduced returns or losses to the fund.

The commodities markets are considered speculative, carry substantial risks, and have experienced periods of extreme volatility. Investments in commodities may be affected by changes in overall market movements, commodity index volatility, changes in interest rates or factors affecting a particular industry or commodity.

Currency ETPs are subject to the risks associated with the value of the foreign currency held by the fund. Investments in currency involves risks such as credit risk, interest rate fluctuations, fluctuations in currency exchange rates, derivative investment risk and the effect of political and economic conditions.  The use of currency transactions to seek to achieve gains in the portfolio could result in significant losses to the portfolio which exceeds the amount invested in the currency instruments.  In addition, exchange rate movement between the U.S. dollar and foreign currencies may cause the value of the fund's investments to decline. The use of hedging to manage currency exchange exposes a portfolio to counterparty risk which is the risk that the other party to the agreement will default at some time during the life of the contract. The use of hedging to manage currency exchange rate movements may not be successful and could produce disproportionate gains or losses in a portfolio and may increase volatility and costs.

Additional Sources: Alkeon Capital, Wells Fargo Investment Institute

  Source: Morningstar, 361 Capital, Wells Fargo Investment Institute


  Source: Blackstone, Alkeon Capital


Wells Fargo Investment Institute, Inc. is a registered investment adviser and wholly-owned subsidiary of Wells Fargo Bank, N.A., a bank affiliate of Wells Fargo & Company.