Should You Invest In Alternative Alternatives?

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While investors have deployed capital into venture capital and private equity funds, credit funds, and REITs for quite some time, “alternative alternatives” or “A2”, represent the possibility of investing in specific securities within each of these alternative asset classes. Just like the public invests in and lends to public companies through individual stocks and bonds — not just mutual funds, the investing public can now invest in and lend to private companies and individuals through crowdfunding.

Alternatives Went Mainstream, A2 to Follow

Once considered an investment vehicle only for sophisticated, high-net-worth individual investors, alternatives — real estate, private equity funds, hedge funds, managed futures, commodities, and venture capital — have become a standard component of almost every professionally-managed investment portfolio, growing twice as fast as non-alternatives since 2005.

For institutional investors, who control about 60% of all retirement assets in the U.S., alternatives comprise about a quarter of their portfolios today, according to McKinsey.

 While alternatives like real estate and commodities have been accessible through REITS and ETFs for many years, over the last decade, hedge funds and venture capital funds became more accessible to high-net-worth individuals and accredited investors due to vehicles like feeder funds. These investment vehicles are typically diversified.

Start-ups, however, remained out of reach for individuals, because only the well-connected, ultra-wealthy could invest in a sophisticated manner. First, unless the investor lived and worked in a start-up hub like Silicon Valley, Boston, or Israel, access to high quality start-up investments was constrained by geography and social network. Second, the minimum investment per start-up hovered around $50,000. Even an accredited investor with $1 million in net worth would incur significant company-specific risk by investing $50,000 (5% of her net worth) into one start-up.