• September 30, 2024
• Alternative Investments

Alternative investments offer retail investors the opportunity to participate in emerging markets and hedge their bets against inflation. While alternative investments open up the possibility of high returns, these investments are also a high-risk proposition. They are typically less liquid and less regulated, making them less secure than traditional investments such as stocks or bonds.

Not all investors fully understand what they are getting into when they put their money into alternative investment options like venture capital, private equity, cryptocurrency, peer-to-peer lending, and real estate. These types of investments are not the right choice for everyone, and they can put your savings and financial future into jeopardy when misused.

Some alternative investment strategies are wrongly marketed to financial clients, which can cause them to lose potentially significant amounts of money. If you need help recovering your funds after you have been misled by a financial advisor, broker, or other financial professional, contact Wolper Law Firm today. We have a 99% success rate working on behalf of our clients who have lost money due to investment fraud or negligence.

What Are Alternative Investments?

Thanks to the accessibility provided by the Internet, alternative investments have gained significant popularity, particularly among the younger generation. A 2022 Bank of America study shows that 75% of young investors are pursuing alternative investments.

Alternative investments are essentially any type of investment property that is not a stock, bond, or cash holding. Some common categories include private equity, hedge funds, structured products, and any “real assets” like commodities, collectibles, or real estate.

Many alternative investment categories are appealing to investors because they can perform well even when the market is otherwise struggling. For instance, commodities like oil, gold, and corn can hold value against a volatile market. Others allow access to emerging markets like cryptocurrency or support for local businesses through peer-to-peer lending (P2P loans). This makes alternative investments a useful tool for increasing the diversity of an existing portfolio.

At the same time, alternative investments are often less transparent than traditional investments due to the lack of public filings required of publicly traded companies. They can be more illiquid, making them difficult to buy or sell quickly. Many such investments have high minimum investment requirements that are inaccessible for smaller investors and better suited for high-net-worth individuals or those with specialized knowledge.

What Are Examples of Alternative Investments?

With alternative investments expected to account for $21.1 trillion of global assets under management by 2025, there seems to be a growing demand for such investments. Alternative investment examples include:

• Real estate: Commercial and residential real estate are examples of alternative investments, as is investing in timberland and farmland. Other examples include real estate investment trusts (REITs) or real estate mutual funds.
• Private equity and hedge funds: Private equity and hedge funds offer a range of options that can deliver high returns, but may lack transparency in their bundled products. The underlying assets can be difficult to value and may carry substantial risk due to their high reliance on debt.
• Venture capital: Venture capital comes with a substantial degree of risk but can provide enormous returns when used judiciously. However, when venture capitalists make shaky investments or mislead investors about the viability of the business or the extent of their investment, it can cause investors significant losses.
• Commodities: Essential raw materials like gold or oil are common commodities, with other examples being livestock, corn, wheat, and some other agricultural products. While commodities traditionally offer some protection against inflation, they are far less liquid than stocks or bonds.
• Managed futures: In managed futures, a portfolio of futures contracts is managed by a commodity trading advisor (CTA). Managing futures generally includes commodities and foreign currency, among others.
• Derivatives: Derivatives can involve high risk and volatility because their value is tied to that of the underlying asset, such as stocks or bonds. However, they are often recommended as a strategy for hedging against market shifts.
• Collectibles: Investments in sports memorabilia, art, jewelry, theatrical props, designer clothing, musical instruments, and other items that are valued above their original sale price are all examples of alternative investments.
• Cryptocurrencies: Bitcoin, Ethereum, Tether, and XRP are examples of digital currencies that can provide high returns outside of the traditional market. However, they carry enormous risks for investors as they are less regulated than traditional stocks and bonds, thereby making them a common target for fraud and scams.
• Equity crowdfunding: Equity crowdfunding and P2P loans allow investors to purchase shares in emerging companies online. This investment can be risky, as around 20% of new businesses fail within their first year of opening, according to the U.S. Bureau of Labor Statistics.

FINRA Regulations Governing Alternative Investments

Brokers and advisors have both professional and legal obligations to offer their clients only those investment options that suit their risk appetites, goals, and portfolios. Financial advisors are governed by FINRA regulations that require them to perform a reasonable examination of an investment’s legitimacy and suitability. When they fail to do so and mislead their clients, they can be held accountable with the help of an alternative investment attorney.

Are Alternative Investments High Risk?

Alternative investments involve higher risks than traditional investments as well as higher costs in the form of performance or incentive fees and significant upfront buy-ins. This is why an investment advisor or broker must carefully consider your investment goals and risk tolerance before recommending alternative investment products.

Risks of Alternative Investments

Alternative investments encompass different financial instruments, each of which carries varying degrees of risks, returns, and regulations. At the same time, all alternative investments operate outside of the traditional stocks and bonds market, and thus are generally subject to the following concerns:

Low Liquidity or Illiquidity

It’s common for alternative investments to have restrictions on redemptions, sometimes called a “lock-up” or “gate”. In other words, an investor’s ability to convert the alternative investment into cash is limited. This is an important consideration for investors who may have high recurring expenses.

Less Regulatory Oversight

Alternative investments are just that: an alternative to the traditional market. This means that they have limitations on historical reporting, such as pricing data. In addition, they are typically less regulated by the U.S. Securities and Exchange Commission (SEC).

High Minimum Investments

Alternative investments may offer high returns when they are successful, but they often have an increased barrier of entry in the form of high minimum investments. They also generally carry higher expenses like performance or incentive fees.

Difficulty in Valuation

A lack of both historical pricing data and reporting of returns makes it challenging to value some alternative investments. Some like structured products or derivatives may also rely on formulas and calculations which can be complex to understand for the average retail investor. Additionally, the culture and secrecy of venture capital firms can limit transparency and make it hard for an investor to know the true value and risk associated with their holdings.

More Complexity

Alternative investments often bring niche legal and tax considerations into play, and may not be suitable for every situation. Even as options like private equity or structured products make their way into 401(k) portfolios and other mainstream investment vehicles, alternative investments are always more of a risk because of their complexity.

Alternative investments are risky for most investors due to the aforementioned factors, often leaving them dependent on their financial advisor. Given the potential for conflicts of interest or the advisor’s lack of understanding of complex investments, it is important to do your due diligence when considering alternative investment options. You can mitigate some of your risks by:

• Conducting thorough research: Take time to understand and evaluate alternative investment opportunities and strategies.
• Investigating alternative investment platforms: Confirm the legitimacy of any alternative investment platforms, especially those that offer P2P lending.
• Hiring the right person: Ensure that you only work with qualified investment managers who have a proven track record of success.
• Following your risk appetite: Avoid investments that fall outside the scope of those that you are typically comfortable with.
• Diversifying investments: Take measures to invest in different sectors, regions, and industries.

Why Are My Investments Losing Money?

Alternative investment assets can leave an investor at the mercy of the fund manager. Even experienced investors who understand the way the market moves may be at a loss when it comes to alternative investments, mostly because the returns are often detached from market shifts. If you suspect that your financial advisor has sold you inappropriate financial instruments, you may need the help of an experienced investment loss attorney to evaluate if your losses are the result of fraud, carelessness, or incompetence.

Are Alternative Investments Losses Recoverable?

Alternative investments may lose money due to various factors, like changes in regulations, resell difficulties, or credit risk. However, if you believe that you are losing money because a financial professional failed to conduct their due diligence or banked on your vulnerability, you should contact an experienced investment loss attorney as soon as possible.

Our firm can help you understand what happened and identify the best path toward maximizing your potential recovery. This might include filing a claim with the Securities Investor Protection Corporation (SIPC) or bringing in a broker complaint with FINRA. We can also help you file a lawsuit against your financial advisor or alternative investment firm if needed.

How Can an Investment Loss Attorney Help Me?

Securities law is a complex field. It can be difficult to navigate it without the help of an investment loss attorney. An alternative investments lawyer can help you file all paperwork on time, build a robust claim with concrete evidence and applicable case laws and statutory provisions, and argue how your alternative investment did not match your financial goals and risk appetite, leading to loss of money. The goal ultimately is to help you recover your lost funds and help ensure that a fraudulent or negligent advisor is held accountable for their actions.

Have More Questions About the Risks of Alternative Investments? Contact an Investment Loss Attorney at Wolper Law Firm

If your portfolio is losing money from an alternative investment, it may be a sign that your losses are due to fraud, abuse, or incompetence. These losses may be recoverable with the help of our attorneys at Wolper Law Firm. We bring years of legal research and hands-on experience to support investors in recovering their funds and ensuring they are not taken advantage of in the future.

If you need guidance in understanding what kinds of actions are legal in alternative investments, as well as if recovery is possible, contact us today for a consultation.