Invest In These Alternative Investments? An Overdue Critique
Updated on October 25th, 2023
A plethora of alternative investment platforms have been created over the last few years each promising a new, better way to make money with exposure to an asset class that was hard to get before. Stocks seem so much more boring when you can invest in exotic things like art, wine and ship deconstruction (really!).
All kinds of alternative investments have been doing exceptionally well since the pandemic, and in many ways well beyond what could have been expected even before the pandemic. It all seems pretty easy. Cryptocurrencies have surged 10x in 2021, baseball cards values have soared, and new digital goods like virtual land and artwork have been invented with non-fungible tokens.
So it has become big business for new companies to come into existence talking up the benefits of new investment X.
The Promise of a Better Asset Class
Some of these platforms just tout how they have had better returns than the S&P 500. It might not be their returns, but the historical returns of the asset class. And sometimes they offer a compelling story of diversification.
Some of these platforms have figured out ways to securitize entirely new markets like art, wine and non-fungible tokens. The question is, should you deploy capital to these exotic markets?
I have been researching some of these platforms and generally I lean towards NO on many of them due to the hidden risk that typical investors would not be aware about. Some just make traditional asset classes easier to access, but others repackage, digitize and make more accessible to the average Joe the same strategies that ended up imploding when the housing market was finally crushed in 2007.
And some of them are just so esoteric like investing in virtual land or wine, it just gets a quick laugh about how ridiculous the concept even is.
You used to have to find out about some of these alternative investments through private LPs by word of mouth of a friend or potentially even through a financial advisor. Now, instead of going down to a tenebrous sales office, and signing some paperwork in front of a 55 year old man with a mustache, you logon to a website and check a few boxes about accepting terms and conditions and you are ready to link bank accounts within a few minutes. The risks aren’t mitigated differently but are just put into a new high tech light.
Capital Is Plentiful
They don’t have to fight too hard to get investors because investing is popular right now. Money is flooding the markets and new investors are being minted daily.
Who doesn’t like the idea of making money with money and earning it without putting in any extra effort? Even better is when it appears that the risk of capital is low, or uncorrelated with traditional asset classes.
With government stimulus sending out thousands of dollars now monthly, Americans are flush with cash and looking for places to put it. Some of it has been going into goods and services, but a lot of it has been going into investing platforms.
Capital is Emboldened
And these alternative investment platforms are flourishing because of the perceived lack of risk and the stock market just bouncing back up on every dip.
Investors have been emboldened that there is no risk in investing.
Furthermore, it’s been a long time since there has been a grueling bear market that crushes the investing spirits and these types of alternative “investments” don’t flourish when people are worried about whether or not they will get their capital back because they often have long lock up periods.
Hard to Find Unbiased Information
The first thing that an investor unfamiliar in a new product platform will do is perform a search and see what experience other people have had. Usually the first thing they click on is “Product X: Review”
So, why do you never find negative reviews of these alternative investing platforms?
The answer: Conflict of interest.
Nearly every review article about basically anything on the internet is an affiliate link designed to drive traffic to whatever they are reviewing. Since they want that commission, they won’t write too negatively (if at all) about it. These reviews read like an advertisement about how great the service is. And that’s really what they are, an advertisement.
And quite frankly they probably haven’t thought too hard about risk of the platform they are promoting anyway probably because they don’t even use it themselves.
Some of my links are to affiliates too, but I wouldn’t promote any product or service that I have fundamental concerns with and I didn’t create my site to solely push affiliate products like most bloggers.
But it’s not just blogs that do it; I come across advertisements masked as commentary or reviews on Yahoo! Finance, MarketWatch and CNBC every day. It’s a real problem in the world of financial media. There is a conflict of interest of extolling the benefits of a particular investing platform because of the commission structure.
Anyone can create a financially focused site and start recommending products they have never used, understand the risks of, or even like. People with better marketing skills win in the website game, not the ones with the most thoughtful information or advice.
Seriously though, am I really the only person with a blog out there who doesn’t like Masterworks, Robinhood or Coinbase? All three are heavily promoted by referrals and affiliates.
Unbiased Reviews
So over the next few weeks I plan on reviewing several of these platforms by pointing out any risks that are swept under the rug and whether the diversification is worth it or not
You may want to bookmark this webpage or signup for my newsletter to get the latest information. If you have a preference about any of these in particular shoot me an email to push it up the queue.
These alternative investment platforms fall into various categories:
How Do I Invest in Alternative Investments?
There are a plethora of alternative investment platforms, but be careful as the risks won’t be obvious from the marketing materials.
Masterworks: Investing in Art (read my review)
Crypto-lending platforms like Celsius (I wrote about it being a Ponzi 5 months before it imploded)
PRO-TIP: If you are US based, trade cryptocurrency and want to avoid the tax hassle see the Alto Crypto IRA. They support 150+ coins, there are no monthly or annual fees, no LLC setup fees, no processing fees, and they charge only 1% on each trade. Any cash waiting in your account is insured by the FDIC.
Individual Cryptocurrencies (watch out for Ponzi schemes!)
Crypto staking (various)
Vinovest: Investing in Wine. lol.
Peer To Peer Lending Platforms
Prosper, Upstart, LendingClub
Real Estate Crowd Funding
There is no shortage of these:
CrowdStreet, EquityMultiple, Ground Floor Financing, PeerStreet, Realty Mogul and probably a dozen more that I haven’t encountered.
Free Investing Tools
For advanced traders who want direct access to exchanges without “payment for order flow” shenanigans choose Interactive Brokers.
I use Axos Bank for its no-fee business account with free bill pay.
The more I see of crowdfunding platforms and other alternatives, the more I shy away. There is no such thing as a free lunch. Index Funds are the closest thing to that, and so that is where a majority of my investments sit. I do own some crypto and I stake it, because I am investing long-term only.
I am sure that many of the sites and investments will work out. This is great that there are new markets emerging and new ways for investors to take on more risk and reap the rewards. Or to reduce their risk, by investing in a pool of other investors.
But I just can’t bring myself to invest in something I don’t know that well. And I don’t want to spend a bunch of time trying to figure out who is legit and who isn’t.
Cheers!
I tend to agree from what I have seen. Generally you are just buying into an illiquid investment with these new platforms without a secondary market. Some try to capitalize on that illiquidity by showing research that their returns are higher because of it, but I am skeptical.
What platform do you stake your crypto on? There are a half dozen or so crypto staking platforms I have encountered so far, but some of them don’t accept US citizens, or citizens of particular states. As part of this list I hope to compare and contrast a lot of these crypto platforms.
Did you mean securitize vs security?
“Some of these platforms have figured out ways to security entirely new markets like art, wine and non-fungible tokens. The question is, should you deploy capital to these exotic markets?”
Yup, typo. Thanks.
I enjoyed the very detailed analysis of Masterworks. I like articles by authors who explore the real facts and truths, who are objective.
At the end of this article on ‘Alternative Investment Platforms’ you mentioned ‘What are good investment alternatives? Stay tuned.’ Did you write any other articles or explore any?
Are there any good investment alternatives?
I noticed a few in the article above such as real estate crowdfunding. A popular one is Fundrise, but it wasn’t listed. What do you think of Fundrise?
What about crowdfunding like Start Engine, Wefunder, Republic, etc?
I try to stay away from crypto. I bought a small amount and then it crashed. Never again.
Thank you.
Hi Karen,
I’ve looked at several of the platforms, but just haven’t written about them (writing’s a lot of work!). Most of the real estate platforms are basically hard money loans where you, the investor, take basically all the risk. If the real estate market implodes, those beautiful IRR projections get dismantled rapidly. Hard money lenders got destroyed in the 2006 housing bubble when portfolios went to zero, but since the real estate market never got that crazy again, I don’t think that the risk of a total wipeout exists for most projects. But a risk I am not willing to play hot potato with.
I decided not to invest in Fundrise for a few reasons. Firstly, I wonder what advantage a privately traded REIT holds over the plethora of REITs you can select on a publicly traded exchange. Fundrise has a great marketing engine and almost everything that turns up in a google search is affiliate marketers.
The fee structure of 1% of assets seems expensive to me and doesn’t scale well like a public REIT would. For instance, I just picked a random REIT AVB, which invests in apartment complexes. It has total assets of $19,902,016,000 and it’s managing operating expenses amount to $73,616,000, that’s a management overhead of 0.36% compared to Fundrise’s 1%. I’d be willing to bet that only the smallest publicly traded REITs have fees as high as Fundrise. Also, to redeem under 5 years there is a 1% redemption fee.
So, okay what about the total return? Surely it would be worth a higher fee if they are outearning everyone else, but what would be the catalyst for them to do so in a free market? As a diversified REIT in multiple markets, there’s no specialization expertise.
Their return table over the last several years shows that they outperformed public REITs in 2022 but is that only because there wasn’t a real market panic in 2022 and a liquidation event didn’t cause investors to sell en masse? I found this gem in one of the offerings:
“We presently intend to limit the number of shares to be redeemed during any calendar year to 5.0% of the weighted average number of common shares outstanding during the prior calendar year (or 1.25% per quarter, with excess capacity carried over to later quarters in the calendar year). In the event that we do not have sufficient funds available to redeem all of the common shares for which redemption requests have been submitted in any quarter, such pending requests will be honored on a pro rata basis.”
So in other words, the Fundrise funds didn’t sell off because only 5% of funds were allowed to be sold off in the first place. In public markets, the funds can dump and be temporarily under-priced and if you are reinvesting dividends, you can capture a bargain for long term investing. It’s illusory that Fundrise’s underlying assets outperformed publicly traded REITs just because sales weren’t allowed.
Then there’s the appearance of a higher dividend yield compared to say, VNQ. Is it because Fundrise prioritizes yield and public REITs prioritize reinvesting for growing their dividend at a faster rate? Another gem seems to indicate this: “We expect that our cash flow from operations available for distribution will be lower in the initial stages of this offering until we have raised significant capital and made substantial investments. As a result, we expect that during the early stages of our operations, and from time to time thereafter, we may pay distributions from sources other than cash flows from operations….including from the proceeds of this offering, the private placements to our sponsor and Fundrise, LP, or the additional common shares sold to an affiliate of our sponsor pursuant to the distribution support agreement….” which is kind of ponzi-ish. I’m not saying its a ponzi scheme, but I think the yield is what brings in new investor capital and they prioritize growth of assets under management by focusing on investor yield.
I feel most alternative investing platforms are just snake oil with a good marketing story and I am not convinced that Fundrise will outperform the public options over a longer term cycle.