Evaluating Private Alternative Investment: Five Questions to Guide Your Decision

Private alternative investments have traditionally been favored by institutional investors, yet recently have garnered interest from high-net-worth individuals seeking portfolio diversification and enhanced returns during volatile periods in traditional markets like equities, fixed income, and cash. However, alternative investments aren't suitable for every investor, making it crucial to thoroughly understand the investment landscape before diving in.

Here are the five critical questions to ask before making a private alternative investment:

What is Your Investment Time Horizon?

Private alternative investments have traditionally been favored by institutional investors, yet recently have garnered interest from high-net-worth individuals seeking portfolio diversification and enhanced returns during volatile periods in traditional markets like equities, fixed income, and cash. However, alternative investments aren't suitable for every investor, making it crucial to thoroughly understand the investment landscape before diving in.

Can You Tolerate Illiquidity?

Private alternative investments are inherently illiquid, meaning they can be challenging to buy and sell quickly.

Although certain registered funds like interval funds and non-traded REITs provide enhanced liquidity compared to conventional private market funds, the majority of private funds come with a 10-year lock-up periods and exhibit a classic J-curve profile. This profile refers to an initial decline in your investment followed by a gradual improvement in the performance which is very common in private equity investments and may not suit investors with immediate liquidity needs.

How Does the Investment Align with Your Overall Portfolio?

Investing in private alternative investments can offer higher return potential, lower correlation to public markets, and diversification benefits. Whether you're looking to enhance your equity strategy with outsized returns or seeking risk mitigation strategies to publicly traded investments, it's important to consider what role a private alternative investment will play in your portfolio and work with a financial advisor to ensure it meets your objectives.

Are You Comfortable with Limited Transparency?

Unlike public markets, where daily price quotes and frequent reporting are standard, private market investments offer less transparency. Fund managers typically provide quarterly updates, but the true impact of their management may not be clear until investments are sold. This limited visibility requires a strong trust in the fund manager's ability to create long-term value.

Do You Understand the Fund and Pricing Structures?

Private alternative investments come with a range of complexities, including
performance fees, capital commitments, drawdowns, liquidity features, and distribution structures. It's crucial to understand your obligations as an investor, along with all the related fees and expenses, before making an investment.

Selecting a private alternative investment as part of your investment strategy demands a comprehensive evaluation of your financial situation and investment objectives. It's recommended to seek the expertise of a financial professional, such as Wealthstone Group, which specializes in providing guidance and understanding in alternative investments. Together, you can explore your goals and the potential risks to make informed decisions before proceeding with an investment.

Considering a 1031 Exchange?

To learn more about leveraging a 1031 exchange for tax deferral, download our free e-book today!

 

General Disclosure

Please note that this information is for informational purposes only and does not constitute individual investment advice. It should not be relied upon as tax or legal advice. Consult the appropriate professional regarding your individual circumstances.

Diversification does not guarantee profit or protect against loss in a declining market. It is a method used to help manage investment risk.

Investing in DST properties and real estate securities involves material risks such as liquidity, tenant vacancies, market conditions, competition, interest rate risks, and the risk of losing the entire investment principal. DST 1031 properties are available only to accredited investors and accredited entities. Verify your accredited investor status with your CPA and attorney.

Not an offer to buy, nor a solicitation to sell securities. All investing involves risk of loss of some or all principal invested. Past performance is not indicative of future results. Speak to your finance and/or tax professional prior to investing. Any information provided is for informational purposes only. Securities offered through Arkadios Capital, member FINRA/SIPC. Advisory Services offered through Arkadios Wealth. Wealthstone Group and Arkadios are not affiliated through any ownership.