A desire to buy innovative products and the prospect of high returns are key reasons high net worth people invest in alternatives. Where should you start?
If rich people are buying an asset class, it is only a matter of time before the rest of us will be looking at it too.
So if 22 per cent of Australia’s high net worth individuals already hold it and 85 per cent of the rich people who have already bought into it are looking at putting more in, that’s an asset that rightly deserves attention.
The primary driver to buy into the sector is portfolio diversification. Bethany Rae
In this case, though, it’s an asset class that is so broad that it is often defined by what it isn’t rather than what it is. We are talking about alternatives.
So what exactly are they? And, more importantly, how do you invest in them?
“The industry considers alternatives to be anything, really, that doesn’t fit into a traditional bucket,” says Gareth Croy, managing director and founder of Your Future Strategy wealth management company.
“So if it’s not equities, it’s not bonds, it’s not property, it’s not credit, then it’s an alternative, is generally how the industry approaches it.”
That includes investments in commodities, infrastructure, hedge funds, collectables, venture capital, private equity, derivatives and structured products.
That’s the investment universe that CoreData and Praemium used in some recent research that gets under the hood of the alternatives motor.
For the purposes of its research, CoreData defines anyone with $1 million of investible assets as high net worth – that’s assets that don’t include your home.
It reveals that 22 per cent of those people are already invested in alternatives. That puts it ahead of commercial real estate (20 per cent) and ethical investments (18 per cent).
Notably, cryptocurrency, which CoreData does not count as an alternative, also stands at 22 per cent.
On average, high net worth investors with alternative holdings invested in about three different assets within the alternative umbrella, indicating a diversified approach within the alternatives sector itself.
For those with more than $4 million in their portfolio, the allocation to alternatives is even more pronounced, with 31 per cent holding such investments.
Infrastructure is the alternative most frequently recommended by advisers (85 per cent), followed by private equity (51 per cent), private debt (47 per cent), and hedge funds (35 per cent).
What alternatives do rich people buy?
The primary driver to buy into the sector is portfolio diversification, with 58 per cent of people in the CoreData survey saying that’s why they invest in them.
The second driver is to get access to exclusive opportunities (43 per cent) and tax benefits (40 per cent).
The tax benefits include Capital Gains Tax exemptions and tax offsets for early-stage companies, the ability to transfer assets as gifts via trusts for collectables, as well as tax-deferred distributions for hedge funds. Investors in some creative arts, such as film or television production, also have generous concessions.
A desire to get exposure to innovative projects or products (40 per cent) and higher return potential (38 per cent) round out the top five reasons for investing.
Interestingly, 85 per cent of people already invested in alternatives say they will buy more.
Of the 46 per cent of rich people who say they are looking at making an initial investment in alternatives, the vast majority are under 40. More than 80 per cent of 18- to 40-year-olds who are not yet invested in alternatives say they will be within 12 months. That compares with just 20 per cent of investors aged over 60.
And why don’t they consider them?
But if interest in alternatives is growing, why are some rich investors staying away?
The top two reasons are that there is too much risk – that accounts for 40 per cent. The second is lack of knowledge or understanding (39 per cent).
The risk of investing in alternatives will vary depending on the subcategory.
Private credit, for example, might pay a relatively secure 7 or 8 per cent interest rate, with only a small prospect of losing all your capital.
A venture capital investor, on the other hand, might typically expect one or two of 10 investments to perform well and the rest to either break even or lose everything.
Leigh Jasper, chairman of Second Quarter Ventures – a venture capital fund – explains it this way.
“The venture capital model works on a power law distribution. Let’s say a fund invests in 10 start-ups. Six or seven will generate next to no return. One or two will do two to five times the investment. But one or two will do incredibly well, returning 10 or 20 times more.
“It’s high risk, high return, but that’s why we love it,” Jasper says, adding that that’s why investors looking at venture capital should consider doing it through a fund rather than in individual bits.
But that kind of lumpy profile is not suitable for every investor.
The same could be said of collectables such as art, stamps or coins. These kinds of investments can be highly dependent on fashion. Just take the case of the art collectors who lost $250,000 on their investments in non-fungible tokens.
For stamp collecting in particular, the drop-off in the use of letters may end up slowly killing off the asset as an investment class because younger generations may only rarely, if ever, use stamps. The same might apply to coins and banknotes in the future.
For those already invested in alternatives, the reasons they may not invest more include high fees and costs (45 per cent) and limited access to opportunities (38 per cent) as challenges.
From a financial adviser’s perspective, lack of liquidity (53 per cent) and higher fees (45 per cent) are the top challenges in recommending alternative investments.
Advisers indicate that more information about investment options and a better understanding of how to implement these investments would make them more likely to recommend alternatives to clients.
Praemium has also made it easier to invest in alternatives through its Spectrum product. It has features that accommodate the often lumpy investment requirements of some alternative products – such as capital call structures, which require investments to be made over a couple of years after the initial commitment.
“Any Praemium investor, once they open up that Spectrum account, is able to access those alternative investments and get that administration capability,” says James Edmonds, the chief operating officer at Praemium.
Where do you get information on alternatives?
Financial advisers and wealth managers are the leading source of information, cited by 50 per cent of respondents in the CoreData survey.
Peer networks and communities (43 per cent), and industry events and education (38 per cent) are also crucial information channels. A third of investors rely on information from platforms such as Praemium and online research providers.
There is also a strong proactive element. Some 28 per cent of rich people come up with the idea themselves and suggest it to their financial planner. Personal or professional networks play a role in introducing those people to the asset classes they suggest.
About Your Future Strategy
Your Future Strategy is a multi-disciplinary financial services firm with experts across the financial landscape, including qualified professionals in financial planning, strategic accounting, lending, investments, estate planning and superannuation.
As financial strategists, they help create a well-designed pathway for people to tick off financial goals to give them choice in their future, whether that’s saving for children’s schooling and university, building a significant property portfolio, creating and protecting their legacy, or retiring early.
The current global economic outlook is marked by uncertainty. With escalating trade tensions, financial market volatility, inconsistent policy responses, and…
The following article was taken from the Australian Financial Review, published on Wednesday, 6th August. Read the article in full below: https://www.afr.com/wealth/investing/rich-people-are-flocking-to-this-asset-class-should-you-20250707-p5md4z
A desire to buy innovative products and the prospect of high returns are key reasons high net worth people invest in alternatives. Where should you start?
If rich people are buying an asset class, it is only a matter of time before the rest of us will be looking at it too.
So if 22 per cent of Australia’s high net worth individuals already hold it and 85 per cent of the rich people who have already bought into it are looking at putting more in, that’s an asset that rightly deserves attention.
In this case, though, it’s an asset class that is so broad that it is often defined by what it isn’t rather than what it is. We are talking about alternatives.
So what exactly are they? And, more importantly, how do you invest in them?
“The industry considers alternatives to be anything, really, that doesn’t fit into a traditional bucket,” says Gareth Croy, managing director and founder of Your Future Strategy wealth management company.
“So if it’s not equities, it’s not bonds, it’s not property, it’s not credit, then it’s an alternative, is generally how the industry approaches it.”
That includes investments in commodities, infrastructure, hedge funds, collectables, venture capital, private equity, derivatives and structured products.
That’s the investment universe that CoreData and Praemium used in some recent research that gets under the hood of the alternatives motor.
For the purposes of its research, CoreData defines anyone with $1 million of investible assets as high net worth – that’s assets that don’t include your home.
It reveals that 22 per cent of those people are already invested in alternatives. That puts it ahead of commercial real estate (20 per cent) and ethical investments (18 per cent).
Notably, cryptocurrency, which CoreData does not count as an alternative, also stands at 22 per cent.
Top picks and portfolio breadth
Among rich people already invested in alternatives, venture capital and hedge funds are the most popular choices, with 45 per cent holding each. Private debt (40 per cent) and private equity (35 per cent) are close behind.
On average, high net worth investors with alternative holdings invested in about three different assets within the alternative umbrella, indicating a diversified approach within the alternatives sector itself.
For those with more than $4 million in their portfolio, the allocation to alternatives is even more pronounced, with 31 per cent holding such investments.
Infrastructure is the alternative most frequently recommended by advisers (85 per cent), followed by private equity (51 per cent), private debt (47 per cent), and hedge funds (35 per cent).
What alternatives do rich people buy?
The primary driver to buy into the sector is portfolio diversification, with 58 per cent of people in the CoreData survey saying that’s why they invest in them.
The second driver is to get access to exclusive opportunities (43 per cent) and tax benefits (40 per cent).
The tax benefits include Capital Gains Tax exemptions and tax offsets for early-stage companies, the ability to transfer assets as gifts via trusts for collectables, as well as tax-deferred distributions for hedge funds. Investors in some creative arts, such as film or television production, also have generous concessions.
A desire to get exposure to innovative projects or products (40 per cent) and higher return potential (38 per cent) round out the top five reasons for investing.
Interestingly, 85 per cent of people already invested in alternatives say they will buy more.
Of the 46 per cent of rich people who say they are looking at making an initial investment in alternatives, the vast majority are under 40. More than 80 per cent of 18- to 40-year-olds who are not yet invested in alternatives say they will be within 12 months. That compares with just 20 per cent of investors aged over 60.
And why don’t they consider them?
But if interest in alternatives is growing, why are some rich investors staying away?
The top two reasons are that there is too much risk – that accounts for 40 per cent. The second is lack of knowledge or understanding (39 per cent).
The risk of investing in alternatives will vary depending on the subcategory.
Private credit, for example, might pay a relatively secure 7 or 8 per cent interest rate, with only a small prospect of losing all your capital.
A venture capital investor, on the other hand, might typically expect one or two of 10 investments to perform well and the rest to either break even or lose everything.
Leigh Jasper, chairman of Second Quarter Ventures – a venture capital fund – explains it this way.
“The venture capital model works on a power law distribution. Let’s say a fund invests in 10 start-ups. Six or seven will generate next to no return. One or two will do two to five times the investment. But one or two will do incredibly well, returning 10 or 20 times more.
“It’s high risk, high return, but that’s why we love it,” Jasper says, adding that that’s why investors looking at venture capital should consider doing it through a fund rather than in individual bits.
But that kind of lumpy profile is not suitable for every investor.
The same could be said of collectables such as art, stamps or coins. These kinds of investments can be highly dependent on fashion. Just take the case of the art collectors who lost $250,000 on their investments in non-fungible tokens.
For stamp collecting in particular, the drop-off in the use of letters may end up slowly killing off the asset as an investment class because younger generations may only rarely, if ever, use stamps. The same might apply to coins and banknotes in the future.
For those already invested in alternatives, the reasons they may not invest more include high fees and costs (45 per cent) and limited access to opportunities (38 per cent) as challenges.
From a financial adviser’s perspective, lack of liquidity (53 per cent) and higher fees (45 per cent) are the top challenges in recommending alternative investments.
Advisers indicate that more information about investment options and a better understanding of how to implement these investments would make them more likely to recommend alternatives to clients.
Praemium has also made it easier to invest in alternatives through its Spectrum product. It has features that accommodate the often lumpy investment requirements of some alternative products – such as capital call structures, which require investments to be made over a couple of years after the initial commitment.
“Any Praemium investor, once they open up that Spectrum account, is able to access those alternative investments and get that administration capability,” says James Edmonds, the chief operating officer at Praemium.
Where do you get information on alternatives?
Financial advisers and wealth managers are the leading source of information, cited by 50 per cent of respondents in the CoreData survey.
Peer networks and communities (43 per cent), and industry events and education (38 per cent) are also crucial information channels. A third of investors rely on information from platforms such as Praemium and online research providers.
There is also a strong proactive element. Some 28 per cent of rich people come up with the idea themselves and suggest it to their financial planner. Personal or professional networks play a role in introducing those people to the asset classes they suggest.
About Your Future Strategy
Your Future Strategy is a multi-disciplinary financial services firm with experts across the financial landscape, including qualified professionals in financial planning, strategic accounting, lending, investments, estate planning and superannuation.
As financial strategists, they help create a well-designed pathway for people to tick off financial goals to give them choice in their future, whether that’s saving for children’s schooling and university, building a significant property portfolio, creating and protecting their legacy, or retiring early.