This article was originally published on The Alpha Pages – Real talk on alternative investments, business & finance.
2016 has been off to a tumultuous and unnerving start – well at least for those whose retirement portfolios are at the mercy of public equity and debt markets.
The “Happy New Year season” has barely ended and already over a trillion dollars has vanished from public equity markets. In the first few weeks of 2016, the DJIA has already lost approximately 8% while NASDAQ has plummeted nearly 15%. (Note: the official deadline for wishing someone a “happy new year” remains debatable).
Investors haven’t been able to find a safe haven in bonds either.
The Credit Suisse High Yield Bond Fund (DHY) is down almost 15% since early January.
Due to lackluster returns, capital continues to drain from bond funds. The Pimco Total Return Fund, one of the largest bond funds in the world, experienced $1.1 billion in outflows last month. And according to JP Morgan, in the first three weeks of this year, total outflows of U.S. high yield mutual funds and ETFs neared $5 billion.
But, not all Americans are sustaining losses.
“Coin toss lucky” citizens were treated to some nice winnings in Vegas. And those fortunate Americans, who are wealthy enough to qualify as accredited investors, were able to capture positive returns by moving their money outside the public asset arena. As conventional assets like stocks, bonds and mutual funds mutilate the retirement savings of America’s middle class, the financially and legislatively favored remain comfortably hedged with alternative assets.
No need to fret. As a national retirement crisis looms, surely the government has a viable plan – such as raising the capital gains tax on alternative investing in order to support a middle class that is rapidly dwindling into poverty. That makes sense. (IF YOU ARE A SOCIALIST AND HAVE NO UNDERSTANDING OF BASIC ECONOMICS!)
On the other hand, the capitalist has a much more pragmatic and democratic solution – simply open alternative asset investing to ALL Americans, not just a privileged few.
Fortunately, a movement to level the investing playing field and grant more Americans equal access to alternative assets is underway.
Expanding the Pool of Investors
Just two weeks ago, the House passed – by overwhelming majority – HR 2187 or the Fair Investment Opportunity for Professional Experts Act. The bill – which was introduced by small investor advocate, Congressman David Schweikert (R-AZ) – is intended to expand the definition of “accredited investor” to include certain natural persons, regardless of whether they meet the income and net worth requirements under Rule 501(a) under the Securities Act. Although not all Americans will meet the new accreditations required under the bill, it is certainly a giant leap in the right direction.
In addition to progress on the legislative front, there has also been some noteworthy developments within the alternative product universe. A new breed of retail alternatives, known as “crowd-centric retail alternatives,” are gradually emerging to bring private equity and private credit investment opportunities to the masses.
Micro-lender, GROUNDFLOOR recently received a groundbreaking SEC qualification that would allow it to open the $70 billion real estate lending market to more individual investors than ever before through the creation and distribution of “Limited Recourse Obligations” (LROs).
And just last month, the Direct Lending Income Fund, a private credit strategy fund that invests in short-term, high-yield small business loans, took steps to convert from a private fund into a public one. Soon unaccredited investors will be able to invest in the fund which, according to sources, historically returned between 10 to 12% annually, was up over 11% in 2015, and is already up .9% in 2016.
“Our objective now is to open up our fund to unaccredited investors so that investors of all sizes have an opportunity to participate in this attractive fixed-income alternative. Despite it being much more cumbersome and expensive for us to be a public fund, we believe that all investors deserve equal access to private debt returns,” said Brendan Ross, Portfolio Manager of the Direct Lending Income Fund and P2P/online lending expert.
Stopping a Looming Retirement Crisis
Whether it is through regulatory easing, retail product ingenuity or simply a willingness by private fund managers to assume the additional burdens and costs associated with being public, the market for retail alternatives is about to mushroom to dizzying new highs. Yet, opening alternative investing to the masses is still just the first step in thwarting a national retirement catastrophe.
Concurrent with broadening access to alternative products, America must revolutionize its retirement infrastructure. Needed are modern retirement vehicles that can facilitate micro-alternative investing. But that is not all. A new type of retirement plan that can accommodate today’s freelance-heavy labor market is also essential. Let’s face it, the defined benefit plan, the defined contribution plan, IRA investing and social security are each inherently flawed. Fortunately, promising new retirement solutions are forthcoming.
Expect to see technological advancements in the self-directed IRA space that will make it both simple and affordable to invest in crowd-centric retail alternatives with retirement dollars. Also prepare for the launch of a next-generation robo-investing app that will transform the 401k industry and forever change the way America saves for retirement.
Throughout 2016, I will be featuring these innovations and many more in my FinTech column on The Alpha Pages.
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