The evolution of alternative investments
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What do a tulip, a bottle of whiskey, Super Mario 64 and a future real estate development project have in common?
If you are smart enough to guess from the title of this article that these are all alternative investments, you would be right. All of these are – or have been – successful investment opportunities. Each article rewarded smart investors who dared to invest their money in non-traditional investments as opposed to stocks or bonds.
How was this alternative market born and what is the evolution of alternative investments for the future?
The beginnings of alternative investing
An alternative investment is loosely defined as any financial investment excluding stocks, bonds or instruments related to cash. Some alternative investments have been around for centuries. The earliest form of commodity trading originated between 4500 and 4000 BC. In fact, these commitments with stipulations of time and date of delivery look a lot like a modern futures contract.
Private art sales date back to Roman times, while the Stockholm Auction House – the world’s oldest auction house – was opened in 1674. One of the most popular speculative bubbles in history arose out of the rare Dutch tulip trade in the 1600s. At its peak, bulbs were trading for up to six times a person’s average annual salary. As early as 1787, the writings of Thomas Jefferson provided early evidence that premiums were being charged for older vintages. If we are talking about collectibles, then you cannot forget about baseball cards. Non-traditional tradable items called cabinet cards were produced in the mid-19th century, although the “golden age” of baseball cards would have started in 1909.
While the above alternative investment vehicles are fun, the more traditional and structured financial mechanisms have a much shorter history. The first private family office (The Bessemer Trust) was founded in 1907. Andrew Winslow Jones is credited with developing the first hedge fund in 1940. Less than 10 years later, the first private venture capital firms were formed. Although land ownership and real estate have a rich history as a part of society, America’s first REIT was not established until 1960.
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The alternative investment industry has developed in a number of ways. First, more investors and businesses are getting involved than ever. In 2020, a survey of high net worth individuals found that 87% plan to maintain or increase their allocation to alternative assets over the next twelve months. The number of institutions invested in private equity in 2015 was 6,170; today, more than 8,400 companies are involved. Almost 1,800 fund managers hold private debt, more than twice as many as just five years ago. Real estate assets under management hit a record $ 992 billion in the summer of 2019, marking the fourth consecutive annual increase in assets under management for the industry.
In addition to the volume of alternative investments, history is being made every day in the space of alternative assets from single transactions. In July 2021, the sale for $ 870,000 of a sealed copy of THE Legend of Zelda broke the record for the most expensive video game ever sold. Two days later, a sealed copy of Super Mario 64 sold for $ 1,560,000. Also earlier this year, the sale of Beeple’s Magnum opus for $ 69.3 million was the third highest auction price ever achieved by a living artist. Don’t forget the vintage vehicles – the most expensive McLaren F1 ever sold was also sold earlier this year.
A hint of devolution
As alternative investments change and evolve, not all aspects of these opportunities are positive. The 2017 Tax Cuts and Jobs Act removed long-standing benefits for collectible investors. Tax law has now prohibited deductible expenses and similar exchanges on collectibles. Intermediaries are also increasing fees in response to increased demand. Christie’s Auction House increased premiums for art buyers three times between 2016 and 2019, while Sotheby’s implemented a new 1% “overhead” charge on all sales from last year. Although used by many as a transactional currency, the cryptocurrency law provides for rates of appreciation of up to 20%. The IRS currently holds the position of immediate tax recognition of staking rewards – even though the cryptocurrency earned has not yet been sold.
In addition, not all areas of alternative investments continue to grow. Although hedge funds rebounded in 2021, around 11,600 hedge funds closed between 2008 and 2020. It is estimated that $ 58.76 billion was withdrawn from industry investors, of which nearly $ 10 billion was withdrawn. hedge funds in December 2020 alone. Precious metals have not performed well lately either. As of this writing, the price of an ounce of gold has fallen 10.45% from a year ago. Although generally used as a hedge against inflation, precious metal prices are under pressure due to a stronger than expected job market as well as continued demand for the US dollar.
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The era of democratization
We can already see what the future of alternative investments looks like, and it is the universal democratization of opportunities. Through the use of technology, investors can avoid high barriers to entry or large capital requirements to get involved in the assets they believe in. You don’t have a wine cellar or are you worried about the physical maintenance of your alcohol investment? Vinovest acquires, stores and ships investments in wine. It is currently offering early access to new investment opportunities through its new WhiskeyVest platform. Finally, non-institutional investors now have access to private equity offers via Republic, a fintech investment platform.
Another evolving trend in the world of alternative investments is tokenization. Tokenization is the act of breaking a large enough investment into digestible chunks for small investors. Also known as splitting, this process legally split Andy Warhol’s “14 Little Electric Chairs” into digital tokens, with each token representing partial ownership of the artwork. Spencer Dinwiddie, a point guard for the Brooklyn Nets, symbolized his NBA contract – allowing him to collect his contract three years in advance and allowing investors to have a bond-backed investment from an NBA contract that would pay out over several years. Many commercial real estate markets such as Red Swan require minimum investments of around $ 1,000; investors can then choose between real estate opportunities across the country in which to invest. While alternative investments were previously exclusive, there is now a minimal monetary barrier to entry to owning a portion of something great.
The future of alternative investments
On the one hand, alternative investments have been around for centuries. On the other hand, Barack Obama was sworn in as the 44th President of the United States just 17 days after the creation of the Bitcoin network. New non-traditional investments are created every day, building on traditional opportunities with a rich history by integrating innovative future applications. For the investor looking to diversify his portfolio, it is an exciting time to be a part of this stage in the evolution of alternative investing.
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