If you want to get rich, here’s one way to do it:
- Find an investment that few investors know about.
- Write a pitch book laying out why that investment is likely to work.
- Sell your idea to rich institutional investors.
- Charge absurd fees.
- Let everyone know that your investment made lots of money for lots of investors.
- When your investment becomes too crowded to produce outsized returns, sell it to unsuspecting individuals.
Steps one through five are a brief history of so-called alternative investments, such as hedge funds, private equity and real estate.
And now, thanks to JPMorgan Chase & Co., step six is underway.
The bank announced recently that it would slash its minimum investment for alternatives to $100,000 from $10 million. The reason, according to Anton Pil, managing partner of JPMorgan global alternatives, is that “many high-net-worth investors continue to be under-allocated to alternatives relative to their institutional counterparts” and that “as we get later in the economic cycle, identifying alternative sources of return is an essential consideration for investors looking to build stronger portfolios.”
It’s true that individual investors could have benefited from alternative investments. The overlapping data for hedge funds, private equity and real estate run from 1990 to September 2017. A traditional 60/40 portfolio of U.S. stocks and bonds — as measured by the S&P 500 Index and the Bloomberg Barclays U.S. Aggregate Bond Index — returned 8.2 percent annually during that period, including dividends.
Adding a 10 percent allocation to each of the three alternative investments — as represented by the HFRI Fund Weighted Composite Index, the Cambridge Associates US Private Equity Index and NCREIF Fund Index Open-End Diversified Core Equity, respectively — would have added 0.7 percentage points a year. And thanks to hedge funds’ ability to short stocks and the fact that private assets aren’t subject to the whims of public markets, adding alternatives would also have resulted in smaller declines during each of the last two bear markets.
Which raises the question: Why weren’t alternatives available to individual investors sooner? The answer is that no one needed their money.
In the early days of alternative investments, plenty of institutional investors were eager to throw millions of dollars at them. And for good reason: There were more opportunities for big payoffs than money chasing them.