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The Pros and Cons of Liquid Alts

In times of economic downturn, many people are turning to alternative investments, rather than risking their money in turbulent markets. This can include everything from private equity to hedge funds to art and even real estate. They tend to be less correlated to stocks and bonds.


The problem with many alternative investments, however, is their lack of liquidity. They typically have longer terms of anywhere from a month to a few years to a decade or more. If you’re looking for a quick turnaround or immediate cash, it’s difficult to get it without taking a loss.


So are there any good alternative investments with higher liquidity, which can be sold easily at any time? There are. They’re called liquid alternatives, or liquid alts. They include things like mutual funds and exchange traded funds (ETFs) in all kinds of investment alternatives such as commodities or distressed debt. They attempt to mimic the strategies of alternative investments with the liquidity of mutual funds.


So are liquid alts a worthwhile investment? Well, like with any investment, there are pros and cons. Here’s what you need to know.


Pro: Lower Minimum Investment


Many alternative investments, particularly private placements, have a required minimum investment amount. It can be anywhere from a few hundred thousand dollars to a few million, depending on the investment. If you don’t have that kind of money lying around, it can preclude you from investing—in essence, in order to generate wealth, you already need to have wealth.


The liquidity of liquid alts means they typically come with a lower minimum investment—often only a few thousand dollars. This allows you to enter the investment with less overall wealth, as well as access smaller amounts on short notice.


Con: Occasional Instability


Alternative investments are, by their nature, illiquid. What liquid alts do is set up a fund that essentially gives them artificial liquidity. It works well up to a point, but if an economic downturn causes everyone in the fund to go for their investment at once, that liquidity can vanish. Much like with a run on the bank, if everyone goes for their money, there’s not enough to go around.


To cover it, the fund manager may have to sell off the alternative assets they’ve invested in. And since they are illiquid, selling them at a moment’s notice may require them to take a loss.


Pro: No Income Requirements


When dealing with large sums of money, it’s important to screen investors and make sure they have enough wealth to cover it. Therefore, many hedge funds require a minimum annual income or overall net worth in order to buy in. Again, this precludes those who don’t already have wealth from building wealth.


In dealing with liquid alts, you don’t have those barriers. As long as you can come up with the money, you can buy in. One of the things that can make them an attractive investment is that they use the strategies typically employed by hedge funds, but on a scale that individual investors can manage.


Con: Higher Fees


While liquid alts don’t have the wealth barrier that hedge funds and similar investments do, they do cost more to get into in terms of average fees. That means less of the money you put in is actually generating returns.


While there are risks involved, liquid alts can be a good addition to a portfolio and a possible way to maintain liquidity during otherwise difficult economic times, as long as you understand them and invest wisely. There is a wide range of options and they can differ significantly in risks and benefits. At Eiger Wealth Management, we can help you make investments that are less correlated to the public markets while maintaining liquidity. We’ll help you find a liquid alt that’s right for your needs.


Contact us to learn more!


The information contained on this site may not reflect current developments; does not constitute investment, tax, or legal advice; and should not be relied upon for such purposes. There is no guarantee that any forecasts made will come to pass. We make no representation about the accuracy of the information or its appropriateness for any given situation. This information is not an offering. Past performance does not guarantee future results.

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