Alternative investments reside beyond traditional investments such as stocks, bonds and cash. Tellingly, the majority of alternative assets are held by large institutions and high net worth individuals. The most common alternatives include real estate investment trusts, hedge funds, managed futures, private equity, venture capital and limited partnerships. Most investments in alternatives are made because the category’s returns usually have a lower correlation to standard investments. Alternative investments make up more than half of the allocation in many large university endowment funds.
Endowment Asset Allocations for Fiscal Years 2017 and 2018
|Global Fixed Income||8%||8%|
|Private Equity /VC||17%||17%|
|Source: The Endowment Index™, calculated by NasdaqOMX® (symbol: ENDOW)|
Real Estate Investment Trusts (REITs)
A Real Estate Investment Trust is designed to own and operate income producing real estate properties. Because of their tax structures, Reits are required to pay out 90% of their income to investors. Like other corporations, Reits can be publicly or privately held.
A hedge fund is open to a limited (Accredited and Qualified) investors. The term “hedge” has come to be applied to many funds that seek to offset potential losses using a variety of methods such as short selling. The benefits of such investment vehicles include lower correlation, specialized expertise and targeted absolute returns. There are a variety of strategies including long-short, global macro, distressed debt and merger-arbitrage, among others.
This asset class is comprised of money managers who direct investments in the global currency, interest rate, equity, metal, energy and agriculture markets. They do this through the use of futures, forwards, and option contracts. Specifically, managed futures focus on using long and short positions in futures contracts, government securities and options contracts. Potentially, they can enhance portfolio returns and smooth volatility since they have shown low correlation to equity markets.
Private equity includes equity ownership in operating companies that are not publicly traded on a stock exchange. The most common investment strategies include leveraged buyouts, venture capital, growth capital, distressed investments and mezzanine capital.
Venture Capital represents a type of private equity capital typically provided to early-stage, high-growth potential companies in the interest of gaining a return through sale or IPO of the company. Investments are generally made in cash in exchange for ownership shares in the company.
Tax Mitigation Strategies
When it is time to sell an investment property (met expectations, fully depreciated, tired of active management), there are many factors to consider. Whether investors are seeking to maximize gains, looking to increase the current level of income, or seeking to dispose of an underperforming asset, simply liquidating a property can create a number of taxable or recapture liabilities and obligations. Investors are taking the first step in maximizing investment results by executing a 1031 Exchange. In some of the highest tax brackets, simply “cashing out” can erode up to 40% of the gains on profitable, low basis assets on a combined state and federal level. With guidance from the Internal Revenue Service, investment sponsors construct securitized real property investments for use as suitable replacement property in a 1031 Exchange. By reinvesting sale proceeds into a securitized fractional real property program, investors may:
• Defer Tax Liabilities Indefinitely
• Keep Investment Dollars Fully Invested
• In Many Cases Improve Upon The Grade And Quality Of Holdings
Investments in private offerings are generally illiquid in nature, do not offer guarantees of income or that objectives will be met, may be considered speculative in nature and could lose some or all of their value and principal investment. Some investments herein may not be suitable for all investors. We recommend you work closely with all your advisors to make the best decisions for your personal financial portfolio.
A conservation easement is a restrictive covenant that is a voluntary agreement that allows a landowner to limit the type or amount of development or conserve and protect natural resources on their property while retaining private ownership of the land. The conservation easement is signed by the landowner (the easement donor) and the Land Trust or Conservancy (party receiving the easement). The Land Trust or Conservancy accepts the easement with the understanding that it must enforce the terms of the easement in perpetuity. The easement is recorded with the County and runs with the land and binds all future owners of the land.
Oil & Gas Drilling Programs
There are tax benefits to developing an oil or gas well. Intangible drilling costs (IDCs) include all expenses made by an operator incidental to and necessary in the drilling and preparation of wells for the production of oil and gas, such as survey work, ground clearing, drainage, wages, fuel, repairs, supplies and so on. Broadly speaking, expenditures are classified as IDCs if they have no salvage value. IDCs include all real and actual expenses except for the drilling equipment.
Disclosure: This is intended for informational purposes only. Investments in alternative investments are not suitable for all investors. Investments in any security may involve a high degree of risk and investors should review all “Risk Factors” before investing. The information contained herein is not an offer or a solicitation related to the sale of any securities. Such an offer or solicitation can be made only to qualified accredited investors through a prospectus or private placement memorandum, which is always controlling and supersedes the information contained herein in its entirety. As with any private placement investment, there are various risks including, but not limited to: complete loss of principal, limited liquidity, limits on management control of the assets, tax status, risk, fees and expenses. Past performance and/or forward looking statements are never an assurance of future results. Individual risks apply and returns are not guaranteed.
Hyde Park Wealth Management nor SANDLAPPER Securities, LLC provide tax or legal advice and you should consult your accountant and/or attorney if considering an investment of this type. Securities offered through SANDLAPPER Securities LLC, member FINRA/SIPC and Advisory Services offered through Sandlapper Wealth Management, LLC, an SEC Registered Investment Advisor. Hyde Park Wealth Management and SANDLAPPER Securities/Sandlapper Wealth Management are not affiliated companies.