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Alternatives Speak to Two Generations

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Registered investment advisors have a huge opportunity to develop client relationships using alternative investments with two demographic groups: baby boomers and the millennial generation, young adults born between the 1980s and the 2000s.

Baby boomers may be looking to alternatives to help manage risk. Millennials may be looking to them for their cutting-edge investment options. Alternative investments have an important role to play in both groups, a role that RIAs can help direct.

First the baby boomers. The newspaper columnist Russell Baker memorably described baby boomers as “the pig in the python.” As they have moved through linear time, they have attracted attention, causing society a certain amount of indigestion along the way. Now they are retiring at the rate of 10,000 a day, according to the Pew Research Center.

As the CEO of an alternative investments firm, I have seen this demographic group’s goals change dramatically in 10 years. They want to make money, but they really don’t want to lose money.

Maybe it’s the cumulative effect of their 50 years’ of exposure to the markets—the Dow sinking to 577 in 1974, the prime rate at a debilitating 21% in 1980, the October 1987 crash, the dot-com bust, the 2008 financial crisis—or maybe it’s better explained by behavioral finance and the notion that investors suffer the pain of loss more than they feel the joy of gains. Whatever the reason, they are no longer interested in swinging for the fences.

Alternative investments, with their potential to profit or lose less in down markets, as well as provide non-correlated returns, have obvious appeal to this group. Even more appealing are liquid alternatives, now the fastest growing part of the asset management business.

It is important to remember that all investments involve risk and there is no guarantee that any investment will achieve its objectives, generate profits or avoid losses. Nevertheless, the chance to combine the long-short investment strategies of hedge funds with the low-barrier-to-entry and daily-liquidity features of mutual funds has sent assets soaring, up 40% annually since the 2008 financial crisis, a Deutsche Bank study released in September found. Deutsche Bank is predicting net inflows of $49 billion into liquid alternatives by September 2015, which would be a 44% increase.

The focus on risk has spurred the development of new risk management software for individual investors—why should pension funds have all the fun?—and I expect this trend to continue. Using questionnaires to determine a baby boomers’ appetite for risk and then modeling their portfolios to see if appetite and reality match up is likely to become more common in the near future.

Millennials, meanwhile, are defined by their openness. They like technology and communications. They like innovative options, including investments that address social concerns such as impact investing. A subset of socially responsible investing, impact investing involves actively trying to invest in companies that will have a positive impact and still make a financial gain. Green tech companies are a good example.

If you have any in your house, you know that millennials care deeply about improving society. They say it should be the No. 1 priority of business, a 2013 report by the World Economic Forum found. (A recent decision by Whole Foods to apply a “responsibly grown” rating system for fruits, vegetables and flowers is the kind of action that appeals to the millennials I know.)

Over the next 40 years, millennials and their older siblings, Gen X, will inherit an estimated $41 trillion from their boomer parents, according to the WEF report. Whether estimates are right that impact investing will grow into a $1 trillion market by 2020 remains to be seen. The point is, alternative investment products specializing in impact investing are available, and the next generation of RIAs, at a minimum, should get up to speed on them.

Alternatives may not be suitable for everyone, but that said, I feel confident in predicting a bright outlook for alts as older investors come to rely on them for risk management potential and younger investors seek them out for their cutting-edge strategies.