An Alternative to Alternative Investments
The thirst for yield has fueled the rise in both speculation and disruption across the investing ecosystem. Dismally low interest rates, global market malaise, and stagnant growth have contributed to a high fascination with all-things-startup and other more speculative investing strategies. Simultaneously, massive disruptions continue to occur, but collateral damage is imminent, particularly where creative destruction rules. For instance, Alan Boyle expects self-driving cars will leave half of the world without a job by 2050. The widening expanse between the haves and the have nots is likely to become another hardball to be debated by both sides of the political spectrum—with both expressing equally widened opinions on viable solutions to the problem. As the wealth separation continues to occur, there will certainly be movers and shakers within each field of investment. These “active” business managers and operators will be the most likely beneficiaries of the rise in automation and technological advancement as they build products that eliminate the need for traditional human capital. The investors who follow them will also benefit from the rising tide.
Hunting for Unicorns
The problem with contrarian and/or alternative investment strategies is they parallel the hunt for pretty unicorns: they assume risk-free arbitrage opportunities abound. While speculation opportunities with relatively little risk theoretically exist, finding them is exactly like hunting for unicorns. The scattered chasing of returns has certainly helped fuel the rise in alternatives.
While the rarest unicorns do exist, the likelihood of main street investors “getting in early” is extremely low, despite what some of the crowdfunding prognosticators have been touting. The reality is unless investors are actively putting in the inordinate time required to track, hunt and nab a unicorn, it is crap shoot at the very best.
A Shift from Whale Blubber
Oil’s recent fall has some reminiscing of a day when whale oil reigned. Used in everything from oil lamps to soap and margarine, whale blubber—especially that extracted from the head cavities of sperm whales—was a common item in the 19th century. Natural shifts in the supply of the oil created a need for alternative sources. Luckily the discovery and widely-applied use of fossil fuels for similar and expanded applications (e.g. automobiles) has all but eliminated the reliance on sperm whale blubber for human use.
It would seem investments have taken a similar course. A precipitous decline in yield worldwide has investors chasing the next equivalent of a fossil fuel. That is, something that possesses similar properties in return, but without the substantial downside costs. Blockchain, virtual currency and debt and equity crowdfunding are all the beneficiaries of this somewhat natural shift toward yield.
In addition, the threat of a potential Fed policy that embraces negative interest rates may further undermine existing trends and drive demand toward riskier alternative options.
Asset Classes, Policy, & Manipulation
Today’s sophisticated investor also faces headwind from several directions. First, long term investors—particularly those using fixed-income debt securities—are being squeezed by the Fed’s QE. These policy changes effectively create an environment that behaves outside of historical norms. In effect, investors are being Fed-forced to brave into unchartered waters.
Second, large, sophisticated institutional investors—including those that operate using bots and high-frequency trading tools—are able to game the system for the smallest hints at opportunities for arbitrage. Excess value can be extracted if you have the money and the tools. In some cases, these shenanigans are performed at the expense of smaller, individual investors. Luckily the law is present to prosecute this type of activity. While these arbitrage extraction plays are most often not performed at the expense of main street investors, they do represent a significant advantage to smaller investors in their ability to gain outlandish returns.
Third, newly touted technologies and asset classes (e.g. crowdfunding, blockchain, etc.) may be touted as “alternatives,” but small investors lack the time and resources to properly vet via due diligence. Even as new direct investing options for real estate, private equity and other financial products crop-up, there is a likelihood that main street is likely to see outlandish returns, unless significant luck is involved.
Even the wealthiest of accredited individuals and the largest of institutions are likely to have a very small proportion of their investments in risky asset classes like hedge funds and private equity. While the truly safe, diversified investments are unlikely to see the outlandish returns in the future, there is safety in at least maintaining an investment’s principal. That is, as long as you can outpace inflation.