Gaining Access to Privileged Asset Classes

One of the key advantages that the wealthy “one percent” have is that they have access to investments that are kept away from you and I, simply because we don’t have enough money. Some of this makes sense – it’s hard to package bonds, for example, in quantities of less that $10,000 or even $1,000. Likewise, it also makes sense to protect investors from risking their money on something that they might not know about.

Take private equity for example. This is an area that requires large chunks of money to get started, and requires a fair amount of industry knowledge and due diligence that the masses, in general, simply don’t have. But by missing out on private equity, the individual investor is at a disadvantage in terms of performance.

CalPERS, the California state pension fund and the largest single institutional investor in the United States, has 14% of its $231 billion portfolio in private equity. That has generated significant revenue over the past five years of about 10% in annual performance during a time when the S&P 500 had negative returns. Private equity, which includes venture capital, is still out of reach for most individual investors. One can buy stock in firms that own private equity, like Blackrock Group or KKR & Co., but there isn’t yet a major fund or ETF that accepts small investors.

That may be changing soon. The new JOBS law, just signed by President Obama, has a clause in it that would allow hedge funds to market to a broader audience. They would still have a requirement that they could only sell to qualified investors who have at least $1 million in investable assets or make more than $200,000 a year. As if having more money is supposed to make them smarter than the rest of us!?

Anyway, these laws are there for a reason – to protect investors. Hedge funds, by their nature, tend to be riskier investments that invest in anything from private equity to market neutral strategies to short selling. They can also charge more for managing investments.

International bonds, global real estate, farmland, and derivatives are also areas that are “protected” from smaller investors for practical and financial reasons.

 

“There are many ways to participate (in non-traditional asset classes),” said Jim Rogers, a long-time commodities investor and co-founder of the Quantum Fund, in an interview. “You can buy farmland. You can buy agricultural products … If you don’t want to become a farmer, buy a mine, or buy a farm, there are other ways to do it.”

Non-farm commodities have already had their run, dominating commodities investments for more than a decade. Food commodities are still in the beginning stages of what could be a long-term growth trend, according to Rogers.

One way to invest cheaply in non-traditional assets is by investing in currencies. Easily available through a brokerage account or as a basket in an ETF, currencies are becoming more popular. But currencies still have one major obstacle:  a lack of available investment information. And the risks are significant if you don’t know where to put your money.

International bonds, likewise, are a growing asset class that is becoming increasingly more popular. As more companies issue bonds, many of them are selling bonds that are accessible either as regular issues, or through mutual funds, or as ETFs. And information on them is becoming more available.

Another asset class is preferred stock.  Like bonds, they can pay as much as 6% or 7% per year on average, and your investment is more secure than those of common stockholders.

(Part 2 of a three-part series on International Asset Classes)

Read part one