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Do you know what alternatives are when it comes to investments? We’ve had some questions come in recently about these types of investments, so we figured it would make a great podcast topic. Tom and Brendan discuss what alternatives are and break down the four main types that investors are exposed to.
An alternative investment is one that doesn’t fall within one of the three traditional asset classes of stocks, bonds, or cash. Most of the time, alternatives (or alts, for short) are purchased as bond alternatives. Meaning the investors in alternatives are often searching for income. The four most common alts are MLPs (Master Limited Partnerships), private placements, bank loan portfolios, and mortgage REITS.
Master Limited Partnerships look like a stock, but they’re really partnerships that are now being structured to provide an exit path for original investors. These investments feature equity and income qualities, however they are mostly purchased for income. Some may have sizable yields. Tom and Brendan discuss an example of a local,New Jersey MLP in the podcast. When the distribution is reduced or taken away from an MLP, their prices tend to plummet. These are not liquid securities and investors should heed the risks involved with them.
Private placements are issued by non-public companies. These companies are looking to raise money for funding, which makes private placements highly speculative in nature. You need to know a lot about the underlying business you’re investing in. Will they be here in year or two? Private placements also tend to be longer term investments.
Bank loan portfolios are illiquid loan portfolios. These are normally made up of loans to small businesses that haven’t been securitized, meaning they’re the leftovers of other bond portfolios. Bank loan portfolios are also long term investments because there’s usually no daily liquidity. Investors can normally get out quarterly on a set date.
Mortgage REITs are real estate investment trusts that don’t own real estate. Instead, they own the mortgages and pass along mortgage payments as cash flow. This means they carry the risk of people not paying their mortgages or prepaying their mortgages. They also carry interest rate risk as well.
As you can see with alternatives, there seems to be a trend of illiquidity and risk involved. They are certainly not for everybody. Anybody considering an alternative or any other type of investment should speak with an investment advisor before making any decision to buy or sell. You can learn more about these investments during this week’s podcast.