When it comes to investing, there are two types of assets: traditional assets and alternative assets.
Traditional assets include everything you'd normally associate with investment: the stock market, government bonds, etc. The defining factor here is that these assets or asset classes are registered with the Securities and Exchange Commission (SEC). Registered securities can be traded by anyone willing to get into the investment business. They can also be traded by publicly available investment funds such as mutual funds or exchange-traded funds (ETFs). Being registered with the SEC is meant as an oversight mechanism to decrease the risk of fraud, which most ordinary investors may not be equipped to deal with in the same way that accredited investors and other high net-worth individuals are.
Alternative investments are riskier than traditional ones, typically offering substantially greater returns.
Alternative investments, then, are assets and asset classes that are not registered with the SEC. This means there's no federal oversight, which is also why you have to qualify for "accredited investor" status to be allowed to put your money into alternative investment opportunities. It's generally assumed that alternative assets carry greater risk because they don't fall under SEC oversight and aren't publicly traded – but this also means they are often much more lucrative than publicly traded securities. Common alternative investment ideas include the following:
- Hedge funds
- Private equity
- Venture capital
- Alternative credit
- Real estate
Since alternative investments aren't subject to SEC oversight, there is a near-infinite number of potential investment options available, from buying vintage cars, precious metals, or fine art to the multitude of hedge funds, all of which operate using different strategies and focus on different investment universes.
How Big Is the Risk, Really?
If you're interested in alternative assets, from real estate investments to hedge funds and CARL's quants, you may wonder: Is the risk really worth it? The truth is that alternative investments do carry more risk than the (in comparison) tightly controlled world of public investment opportunities. This doesn't mean that all of them are high-risk endeavors, though.
For example, hedge funds can use hedging mechanisms to control the risk they're exposed to by using long/short strategies. This can make investing in a hedge fund less risky than investing in a mutual fund. It all depends on the investing strategy of the fund and how much risk management is already included.
Further Limiting the Risk With Quants
If you're interested in the great returns that hedge fund investment strategies offer but you'd like to be able to limit the risk to which you're exposing yourself to, quants may be the alternative investment for you. These hedge funds use computer algorithms, sophisticated machine learning, and large-scale market modeling to make their investment decisions, which eliminates the risk of human error in decision-making.
Historically, quants have typically outperformed traditional funds, particularly in high-volatility market environments, in which traditional funds would normally be confronted with increased risks. In some ways, the quantitative approach can actually work as both a yield-increasing mechanism and a risk-management feature.
For most private investors, there are two big hurdles to overcome when trying to get into alternative investments. Firstly, you need to be an accredited investor to be allowed to invest in unregistered securities. This is one of only a few SEC regulations to which alternative investment opportunities must adhere.
As per SEC regulations, an accredited investor is anyone with either
- an annual income greater than $200,000 ($300,000 for couples filing jointly),
- a net worth over $1,000,000 (excluding the value of your primary residence), or
- a Series 7, Series 65, or Series 82 license in good standing.
Any trader, fund or broker dealing in unregistered securities is required to determine your accredited investor status before doing business with you. This means you'll have to prove your status to each of them individually by showing the required paperwork.
The second requirement to invest in alternative assets is a bit more complicated. Since hedge funds aren't publicly traded and rarely advertised, you'll need to find out about them in the first place. For example, in the world of hedge funds, it's generally easy to learn about the existence of the top-grossing hedge funds – but even very lucrative smaller funds often require you to do some research: Which funds are available? How do they work? What do they invest in? And, perhaps most importantly: Do they currently admit new investors?
Before CARL, you would have needed to find out all of this yourself. And in many cases, you'd only be able to get important information about a fund's investing strategy after you'd already put money into it. With the CARL app, you can easily access all essential pieces of information from your smartphone and invest in whichever fund most appeals to you and your investing approach.
The Challenges Presented by Illiquidity and Minimum Investment Levels
Liquidity is a significant challenge with many of the most lucrative alternative investment vehicles. Private equity investment firms, for example, typically don't allow you to withdraw your money for many years after the initial investing period, as they invest in companies and try to increase their value over a long period of time. Likewise, hedge funds typically have long lock-up periods of 6 months or longer. This means that after you've put in the order to withdraw your investment, you'll need to wait for the entire lock-up period before you get your cash back. Naturally, things can change significantly within 6 months, so you might actually miss the best opportunity to pull your money out and incur more losses as you wait.
CARL's quantitative strategies have no lock-up periods and minimums of $20,000, make them a significantly less risky and much more liquid alternative investment option.
At the same time, many alternative investment firms require large minimums to even allow you to become an investor in the first place. For hedge funds, it's not unusual to have minimum levels of $100,000 or even millions of dollars. Combined with the relative illiquidity of your investment, this means you're putting quite a lot of cash on the line.
This is where CARL comes in to help you organize your alternative investing strategy. CARL provides easy access to some of the most sophisticated quantitative strategies, with no lock-up periods whatsoever. You can withdraw or invest on a monthly basis, allowing you to react quickly to changes in a fund's investing strategy, the overall market situation, or unexpected expenses that have cropped up in your life. At the same time, CARL's quants have a minimum investment level of only $20,000. In other words: It's significantly easier to dabble in quants or limit your exposure to risk by limiting the percentage of hedge fund money in your overall portfolio. Whether you only want to add some diversification to your portfolio or go all-in on quants, CARL's got you covered!
Why Invest in Alternative Investments in the First Place?
While alternative investments pose many challenges, the results are well worth it: Alternative investments tend to net much greater returns than traditional ones. For example, CARL's quants offer 15%+ targeted returns – significantly more than you'll get out of long-only stock picking.
Naturally, you don't need to put all of your money into alternative investments. You can also follow an alternative strategy for diversification. Or you can invest in high-yield alternative options while limiting the overall risk to your portfolio with low-risk traditional investments such as stocks and bonds.
If done correctly, these investments can turn from high-risk, high-reward opportunities to high-reward investments at a manageable level of risk.
Ultimately, you need to consider this: alternative investments offer tremendously increased returns than traditional investments, though at a greater level of risk and often less liquidity. It's up to you to determine how such a risk-reward spread fits into your investing strategy. And if you don't want to take the risk or you don't want to get into illiquid long-term investments, there are always CARL's quants with no lock-up periods and a significantly lower minimum investment level compared to other high-performance hedge funds.
Alternative investment opportunities are a great way to enhance your portfolio with significantly greater returns compared to traditional investment vehicles. And with CARL, you can even avoid most of the downsides, such as illiquidity and large minimums. The CARL app puts the power of quants in your hands and allows you to invest in high-performance quantitative hedge funds from wherever you are. With 15%+ targeted returns, CARL's quants can be the cherry on top of your portfolio. Contact CARL today to set up your account, learn about our funds and start investing according to your investing strategy.