Alternative investments are no longer alternative- they’ve become an essential part of retirement planning. Retirees are increasingly investing in non-traded REITs, interval funds, and private placements in order to generate income and grow their assets.
According to a recent article in Kiplinger
With valuations lofty and yields low in the traditional stock and bond markets, many older investors are casting about for alternative investments that can offer attractive distributions and low correlation with plain-vanilla investments.
However retirees need to be cautious. Finding the best funds and avoiding disasters requires carefully reviewing fees and performance.
From Kiplinger again:
Such benefits, however, come at a cost. Compared with traditional investments, these holdings can have much higher fees and lower liquidity—meaning it may be difficult or impossible to get your money out when you want it. The investments can be complex and have varying levels of regulatory scrutiny.
Kiplinger interviewed Jacob Mohs, the founder of Interval Fund Tracker, to discuss challenges in vetting interval funds. Like non-traded REITs and private placements, interval funds often offer an enticing headline yield. However, investors need to avoid getting sucked in by they yield and instead rigorously analyze the distribution coverage, and the overall total returns that the fund can deliver,
We also noted that interval funds need to be considered as an illiquid part of the portfolio, because it can take several quarters to exit in times of stress. Most interval funds offer quarter liquidity, but if the repurchases are oversubscribed, they are generally pro rated. This allows funds to capture a greater amount of illiquidity premium in their investing strategy. Additionally, it prevents investors from exiting at the worst times possible. In a major liquidity crisis, interval funds investing in illiquid sectors such as private credit will generally hold up more robustly than mutual funds using similar strategies.
Perhaps the biggest challenge faced by retirees investing in alternative investments is lack of reliable information. Although interval funds and non-traded REITs are publicly registered, many of their holdings are private. Additionally, alternative asset managers typically disclose less detail than other fund managers marketing towards retail investors. This is exactly why we launched Interval Fund Tracker. Increased transparency leads to better results for investors.