Should Retail Investors Just Say No to “Alternative” Investments?

Financial Advisors are expected to move $20 trillion of their clients’ money into so-called “alternative” investments (or ALTs) in the next 5 years. These investments include hedge funds, private equity, non-traded REITs and “pre-IPO ” share holdings. There are some serious drawbacks to ALTs that retail customers need to understand before taking the plunge.

ALTS lack “liquidity ” as there is no direct market if an investor wants to sell out. In fact, some ALTs require an investor to hold on for five or ten years before selling out. Many private equity funds such as Blue Owl have experienced substantial losses; investors seeking to cut their losses are stopped from exiting due to a “gate,” which limits redemptions. The “net asset value” (NAV) of ALTs is determined by the issuer and often does not reflect the true value of the investment.

Recent reports of Funds holding Pre-IPO share, such as SpaceX, detail investors being abused as well as charges of outright fraud by “boiler rooms” selling Pre-IPO private companies. The Financial Advisor pushing the ALT usually derives a high commission (as high as 5 to 10%) often embedded into the price making it difficult for an investor to see. The high fee undoubtedly serves as the incentive to push these products.

Given all the risks of ALTs, should investors just say “no” to such investments? Its best to consult an investment fraud lawyer to evaluate whether the ALT you are investing in is worth it.