In the ever-evolving world of finance, seeking avenues to optimize returns while managing risk is paramount.
At Integrated Advisors Network we believe that the key to achieving financial success lies in diversification. We’re excited to introduce you to the realm of alternative asset classes like the opportunities in federal government leased real estate. In today’s blog, we will explore how embracing these alternative investments can offer clients an unparalleled opportunity to navigate the market in this Q&A with Tom Gentry from Gray Harbor Capital, one of our Alliance Partners.
How can the addition of alternative asset classes help me grow my practice?
Tom Gentry, Gray Harbor Capital: You can grow your practice by differentiating it from many advisors who only use traditional asset classes. In recent years the equity and bond markets have experienced considerable volatility. Alternative asset classes have been used with institutions for long periods of time. Why? They gain better risk adjusted returns based on multiple factors like lower correlation to traditional markets, higher yields, tax efficiency and inflationary hedging.
RIAs now have access to many of the same strategies as institutions, but at much lower entry points. If you are not educating yourself on alternatives and the different sectors and offerings that exist today, you’re missing an opportunity. This is especially true in the accredited or qualified investor space to capture additional AUM and more referrals by offering these products.
If I am considering adding Private Alts to my product mix, what are some of the core fund attributes I should be considering?
TG: Good question. In today’s environment there is broad diversification across the alternative spectrum. Therefore depending on the sector you would consider different attributes. At Gray Harbor we invest in real estate leased to the federal government. Some of the key attributes of our offering are our fee-only perpetual life structure. We are a noncommissioned product whose fees reflect an alignment of interest with our investors and their returns.
We pay a monthly distribution rate that is fully covered by FFO (funds from operations). And we have been 100% tax efficient for the past two years. You are capturing government credit and the low correlation that comes with real estate. This is a yield premium for that illiquidity and unlike T-bills, a tax efficient income stream.
How have alternative assets evolved to be better suited for fee-based advisors?
TG: Well first, we have seen an evolution in the number of share classes depending on the type of fund. This is important because fees can weigh heavily on the ability of a fund to sustain distribution or income coverage in terms of FFO. Additionally, in the ability to reach and potentially exceed their preferred return targets.
We are seeing more funds structuring their products for the fee-based advisor community. There is an alignment of interest with the investor in terms of fee structure and potential liquidity options. What I mean by that is lower management fees, higher transparency in overall fees and funds where the sponsor is incentivized by long term performance rather than up front fees.
How do real estate funds assist in hedging inflation?
TG: These funds assist in hedging inflation in many ways, but here is an example. Property values tend to keep up with rising costs. As inflation rises, so do property values, and so does the amount a landlord can charge for rent. Property values over time also tend to stay on a steady upward curve. Real estate can generate yield above the rate of inflation by locking in low long-term mortgage interest rates. It can also export inflation to tenants by raising rents. And final investors profit from the potential increase in home prices over the longer term.
How do I access liquidity in private alternative assets? What are some of the advantages/disadvantages of private alternatives vs publicly traded ones?
TG: Due to the nature of private alternatives, they can be illiquid by nature, like Real Estate, as an example. Most sponsors have liquidity provisions within the fund and they can vary. But it’s important to note that there are limits traditionally on what percentage can be redeemed quarterly or annually. These assets have limited liquidity outside of annual cash flow.
This limited liquidity is also what can make private alternative assets attractive to an investor. Investors in illiquid assets require compensation for the added risk of investing their money in assets that may not be able to be sold for an extended period. This is especially true if their values can fluctuate with the markets in the interim.
Alternative investments typically have little to no correlation to the stock market unlike public alternatives. They can run as high as 90%, which means they can add diversification to a portfolio. They can also help mitigate volatility. Some can also offer tax benefits not available in traditional investments.
Like any investment, the rate of return for alternatives is not guaranteed. But there is potential for it to be higher than that of traditional investments.
To learn more about Gray Harbor and the Integrated Platform, contact Linda Pix.