Risk vs. Return Considerations for Alternative Investments

14 May 2018·In

This information summarizes important risk-related considerations for Investors making Alternative Investments.

  • Evaluating a potential investment is, arguably, the most important aspect of any investing activity, whether as part of a private Securities Offering or for a publicly registered investment. No investment is riskless, and losses will inevitably happen within a portfolio. Limiting losses and achieving the projected returns of performing investments is, therefore, critically important.
  • Alternative Investments offer the opportunity for substantially higher returns than comparable publicly registered Securities, but Investors must be committed to a deal-by-deal analysis process that thoroughly evaluates each opportunity, both for its individual merits, as well as its consistency with the Investors’ overall investment goals and risk tolerances.
  • Alternative Investments, because they have virtually no ability for Secondary sales (i.e. sold to another investor), are typically priced at a premium to comparable publicly registered Securities. This offers the opportunity for incremental yield to private Investors, but it severely limits Investors’ ability to actively manage their investment portfolios.
  • A key for individual Investors to consistently achieve a successful portfolio of Alternative Investments is to diversify (no more than 10% exposure to a single transaction) and to subject each investment to comprehensive due diligence. Due Diligence includes an independent testing of all the basic Issuer disclosures and the underlying elements of the business model driving the success of the company being financed.
  • For most investors, the aggregate Alternative Investment allocation should be a minority (say 5% to 10%) of their overall portfolios, with publicly registered investments and other more liquid investments comprising the balance.
  • Alternative Investments should be made with Investors’ discretionary funds — that is, cash resources which Investors can lose without affecting their important personal obligations such as mortgages, college tuition, retirement, etc.
  • There are two general categories of risk accompanying any investment: fundamental risk and market risk:
  1. Fundamental risks are those relating to the business being financed, such as the cost of production, customer demand for its products, personnel performance, etc.
  2. Market risk pertains to the ongoing volatility of the public financial markets and its impact on the potential liquidity or relative attractiveness of a private Security.

For additional information relating to Alternative Investments, turn next to “Why Alternative Investments?