Replay: How the Wealthy Invest & the Alternative Investment Continuum

Hello, future billionaires. Welcome back to another episode of the Invest Like a Billionaire podcast. We've got a fun episode for you today. This is actually going to be a replay of an old episode that we recorded several years ago. Um, actually our first episode is called How the Wealthy Invest in the Alternative Investment Continuum. So if you're newer to the podcast, every once in a while we like to throw in an older podcast that we've done because a lot of the early episodes that we've done and the content that we've done kind of builds on itself and we don't recycle a lot of content many times. So sometimes it helps if you're newer to kind of get up to speed on some of these things. And if you listen to all episodes up to this point, it's always great to go back and kind of hear a refresher on just, this is a great one, just some of the basics of alternative investments. So hope you enjoy. And if you are, please be sure to subscribe, leave a review, share with a friend. We appreciate all that.

And, uh, here you go. This is the Invest Like a Billionaire podcast where we uncover the alternative investments and strategies that billionaires use to grow wealth. The tools and tactics you'll learn from this podcast will make you a better investor and help you build legacy wealth. Join us as we dive into the world of alternative investments, uncover strategies of the ultra-wealthy, discuss economics, and interview successful investors. Welcome to the Invest Like a Billionaire podcast. I am your co-host Ben Fraser, joined by fellow co-host Bob Fraser. Bob Fraser. So we are really glad that you're joining us. This is episode 1, and this episode we want to talk about really why are we doing this podcast? What made us want to put put the time and effort into putting this content together for our listeners and we're really excited about it. You know, it's a little bit of work to do all this research and everything, but we're really excited to share a lot of this with our investors. And really the goal here is to educate investors on the world of alternative investments. And what we've discovered through working with investors with our funds, which is Aspen Funds, and other institutional investors is that there's this huge gap investing between the ultra-wealthy, you know, the billionaires, the family offices, the pensions, endowments, and the average individual investor.

The way they invest.

Yes.

So, so the little guys invest totally different than the big guys.

Yes.

And the difference is what?

Alternative investments. And, and really that's made up of real estate, venture capital, hedge funds, which we'll talk about a little bit later. But the whole point is it's not just a small incremental difference. It's a massive gap. Right. And the real reason is up until about 10 years ago or so, most of these types of investments were not available to the general public, the general retail investor. And through the JOBS Act of 2012, it completely transformed the landscape of these types of investments. And the access that the—

So now the little guy has access to the same vehicles that the big guys have. And they can play that game.

And the big guys have been doing this for a long time, a long time. And so now it's looking at what are the strategies, what are the investment types, what are the kind of tactics and tax strategies that these investors are using at a very large level and bring them down to an individual's level of how can we emulate the best practices? Right? And, you know, the first question may be, well, I'm not a billionaire, so I can't invest like a billionaire. And you're right, but there's things that you can pull from best practices of what they're doing and how they're doing it.

You can actually get close.

You can get pretty close.

Yeah.

And so before we kind of jump into that, we just want to show you some, some pretty interesting charts. And through our research, and we saw this, and we've talked with our investors about this, right? And our investors understand the need for filling this gap, but it's too good not to share, right? This is information that the general public needs to see because there's this huge opportunity for improving the returns in our portfolios and making our diversification much better. This first chart we want to show is some research that we've done that shows the disparity between how institutions are investing and how individuals are investing relative to alternative investments. Look at this. So the average institutional investor is investing somewhere in, you know, close to 30% range, 25 to 30% in private alternative investments.

So this means not in public stocks and bonds, basically.

Yes, yes. So it can be real estate, it can be venture capital, it can be hedge funds, but it's something other than stocks, bonds, and mutual funds, which is, according to this chart, 95% of what the average retail individual investor is investing in. Through their financial advisor or just what they're familiar with, right? This is what most people think of when they think of investing is, "I'm going to go buy some stocks, go buy some Apple, go buy some Tesla, and that's investing." And that's not bad, but there's huge advantages to alternatives.

And we're going to get into that and show what some of those advantages are.

Right. The next chart here is a chart from the Yale Endowment Fund. So everyone has heard of Yale, right? Ivy League school, one of the better educational educational institutions out there. But what a lot of people may not know is that their endowment fund is really a pioneer in this space, and they've been pioneering this for decades. I think it was the 1970s, they kind of— when everyone was zigging, they decided to zag and went into private alternative investments and made it not just a small little, you know, toe dip. They kind of made a pretty big, pretty big target allocation to these, these investments. And proven out very well for them. So they've been a pioneer, they were the first ones to do it, and now a lot of these bigger endowments like Harvard and other ones are following them, but they're really the first.

So you can see their allocations and look at this domestic equity, just to point that out.

Yeah, at the very bottom of the chart you see the, the domestic equity, 2.25% in, in basically U.S.

stock market, right?

Which is very pretty much inverse of the average.

So, so why is Yale so cool? Why should we pay attention?

Well, what it all comes down to is, are you getting better returns, right?

And risk.

That's ultimately— and risk. What's the risk you're taking to get those returns? They have outperformed their domestic equity index by a pretty good margin. Over the last 20 years, they say they've hit nearly a 10% annualized return ending June of 2020, the 20-year timeframe up to that point. During that timeframe, the stock market basically returned about 6.2%.

So they got almost 50% higher returns.

Yes.

Than, than the basically the stock market.

Right. And so you may think, well, that was kind of then and, you know, maybe they're changing now. Now this is recent data that they are targeting for.

And the crazy thing is they've done this because their mandate is less volatility, right? They don't want the volatility of the stock market because they're running an endowment. So they've actually achieved those gains. With less volatility than the average investor. So it's insane. They, you know, these, all these alternatives are the key to doing that, right?

And one concept that we'll talk about in future episodes is really risk-adjusted return, right? You can have two different opportunities that are going to pay the same return, but if one has a lot more volatility, which is really a great proxy for risk, right, is How, how much is the price going to go up or down in a given time period? And how, how big are those price swings? You, you want the one that's going to have a lot less volatility that offers the same return because you're— it's, it's just much, uh, much safer, right? Much, much better. So, um, that, that's really what, what they've done and it's proven out for them. You know, the next chart here is, uh, from a group called Tiger 21. So most people probably haven't heard of this group. Um, it's, it's pretty cool. It's Uh, it's pretty much an exclusive club for the ultra wealthy and you have to have, I think, $10 million of investable assets, uh, to be a part of this group. Um, but then they publish all this research of what are their investors investing in. I think they have, you know, around $70 billion of assets.

That's kind of a look inside their portfolios.

Yes.

So they're kind of, and they share this. Yeah. You can see how the, how the ultra wealthy are, are investing. So what, what does the chart tell us here?

Yeah. Well, it's, it follows the same lines, what we've seen in the past charts, right? So The number one category is real estate, and this is private real estate, so private real estate investment opportunities. The next one right behind it is private equity, and we're going to do a whole episode on that.

So those, those two together are 50% of their investments.

Yes, yes. And you know what, taking one quick step back to Yale is they actually target a 50% allocation to these private alternatives in illiquid investments as well. So that 50% range is higher than even what we saw.

Every day investor has 9 times less, right?

Right. So it's a huge, huge gap. Um, and you know, their allocation to the stock market, domestic equities, is around 22%. So it's not that they're not investing in stocks, right? But it's just, it's, it's one little, it's one portion And it's a decent size portion, but it's not the main thing and it's not the only thing, right? And that's really the key here. Another chart we want to show here is, this is from Ernst Young. This is some data that they've published. And this is looking again at the alternative investment space. And they kind of track the ultra-wealthies' allocations to these different asset classes, hedge funds, real estate, private equity, and the trends over time. You know, real quick, you want to hit a few of the kind of main—

and it's basically 25%, 25%, 25% in the most recent data, hedge funds, real estate, and private equity. So that's 75% of their investments are alternatives, right? And what E&Y is tracking, right? So, and in those, the big 3 alternatives.

So if this data is not compelling, then you might not want to listen to this podcast anymore because this is what we're going to be talking about. And this is the real big gap here and what a lot of investors when they see this, there's this big disconnect. It's like, well, why am I not hearing more about this? Right? And, and that's what we want to do. That's what we want to share with, with investors is help you be smarter in how you're investing. Find these opportunities.

What are they? How do they work? What are their pros and cons? How do you find them? How do you do the due diligence on them? What are, what are some of the big players in the space doing? So we'll actually be doing interviews with, with individual investors who are, who are there. And getting their tips and strategies as well as timing. What do they think are the hot alternative strategies for this current season?

Right. What we've really found through a lot of conversations with investors and even financial advisors is the biggest challenge here is generally lack of education, number one, and lack of access, number two. Right. They theoretically like the concept like, "Oh, this is really cool. I want to get returns like that." I don't know where to go. Where do I find— I just Google best alternative investments, right? And so it's this challenge of, one, I don't really know what I'm doing. And two, where do I even find these opportunities?

Right. But I don't think most investors feel confident in their ability to make the call. Right. Right. They don't understand it enough to know what to do. And even, you know, these private real estate alternatives, as simple as you think that would be, there's a lot to know about this. And I think most investors don't feel confident in their ability to make that call. So that's one of the things we want to do is pull the covers off this and really look in depth at some of these alternatives and how to win with alternatives.

Right. So outside of this podcast, Bob is a co-founder and co-CEO of Aspen Funds and I'm a VP of finance at Aspen Funds. And through Aspen Funds, we've been in this space for a while, right? You got private alternative investments and we manage investment for hundreds of retail investors as well as institutional investors. And so we've been in this space for a while and we want to get more people excited about this because what we've been experiencing and what our investors are experiencing is open to a lot more people than are in it right now. And really what we want to do is help investors become smarter. We want to talk about, you know, what are the economic cycles and what are the trends going on in the economy that impact how we should be investing and help us make smarter decisions to be on the right side of the economic cycles, right? We want to look at what are the investing trends and we hear all these buzzwords that the media is throwing out there and what does that mean? Are these something we should be paying attention to? And then really, like you said, we want to uncover a lot of these opportunities that maybe most investors don't hear about all the time and present, have a platform for these kind of cool opportunities to be shown to investors. And then just really train investors on how do you do due diligence? How do you determine if this is a good opportunity and where do you go find these? So Bob, you want to talk a little bit about your background and just kind of how it relates to this alternative investment space? Sure.

I was trained at UC Berkeley as a computer scientist, so I have a very analytical kind of personality and ran a big tech business in the early '90s and that was a great learning experience, but also have run a hedge fund for several years, been a private investor for several years, very successful. At different points. And my background is— and my passion really besides Aspen Alternatives is really economics. And I'm a student of economics and have been writing an economic newsletter for many, many years and a pretty good track record there.

Yeah, that's awesome. And if you guys haven't seen our economic content, you know, definitely look for that in the resources tab because we love to publish that. My background— so I'm a finance MBA graduate and right out of college went into kind of investment management. So worked for kind of a large boutique investment manager and working with institutional investors. And these were, you know, $100 million up to billion-dollar investors that were investing in these kind of alternative investment strategies. And so got just a really unique experience and window into how these—

Institutional alternatives.

—big endowment, big pensions, how they look at and evaluate these types of opportunities.

And before that, you worked for a registered investment advisors managing hundreds of millions of dollars. And so, you understand the mindset of investment advisors and how they manage other people's money, which is a little bit eye-opening, right? I mean, it's like looking how the sausage is made here. It's not always flattering. And then you've also been a commercial banker for many years. You really understand how to pick apart a deal and how to understand who's making money, how they're making money, and why they're making money. So you have a very diverse background. It's very, very, very interesting in this whole alternative space. Yeah.

So really, who is this show for? We kind of have two primary goals and types of folks that we're trying to appeal to with this. And it is important to note on the front end here that most of these opportunities are going to be limited to accredited investors, right? And that's just a rule set by the SEC of who they basically determine who can and can't invest in these. Now, that is changing and hopefully, you know, a year or a few years down the road that continues to open up as there has been some movement there. But, you know, that's basically, you know, have a net worth of $1 million or more excluding your primary residence or being a high-income earner, right? If you have a single income of over $200,000 or a joint income of over $300,000 for the past few years, then you qualify. So that's, you know, it's important to say that because these are kind of limited to those folks. Most investors that kind of have built up a net worth, in our experience, have mostly done that through putting money away in a 401 and getting a company match, and they've been high-income earners, but they're not experts in investing. And so they've just, you know, said, hey, stock market's easy. I just, you know, set it and forget it, don't worry about it. You know, but you've now become interested and you've heard about these types of investments and you want to learn more, but you don't know where to turn to. And that's a pretty big subset of our investors, right? Where they've kind of been exposed to this, but they want to get more into it. And so we really want to help break down, you know, what does the private market look like relative to the public markets? And, you know, a lot of investors right now are wary of current valuations in the market, right? And they don't know what, where the stock market is going to go. It's been going up for a while, but it's becoming more volatile. And they want diversification, right? Diversification, everyone knows that that's important, but it's difficult to get. And especially, you know, over time, correlations have increased between public asset classes, which we'll talk about another time. But the other kind of core person that we're trying to, you know, impact and reach in this podcast is kind of the active real estate investor. So there's been a lot of investors that have made money through real estate actively, you know, buying rental portfolios or investing in other asset classes. But they want to go more passive, right? And so they've made good money in real estate, but they want to kind of hand the reins over to somebody else and not have to be in the day-to-day. Passive is good. Passive is good, right? So that's what we're going to break down is what does it look like to invest passively in these types of deals where you're not the one having to actively manage the day-to-day, right? And so how do you find the right sponsors to work with? How do you do the right vetting and make sure they're not crooks and frauds, right? Exactly. That's what we're going to talk about and kind of who we're targeting. And really, we really wanted this podcast to appeal to what people wanted. So before we even kind of launched this, we did a survey with all of our email list and all of our investors and got some really great responses back. I said, "Hey, what are you most interested in hearing about?" Right? Like, "What do you want to hear? Like, we have some ideas, but we want to make sure it's going to be interesting to you." And it was really interesting data. So the number one kind of interested topic that, that folks chose in the survey was just understanding the types of alternatives that are available, right? It's, it's just most people don't, don't even know what's available.

What does the universe look like?

What does the universe look like? And it's, it's growing all the time. There's more and more things being opened up. So that's, that's kind of the number one thing, and we're going to hit a lot of that, right? Um, the, the next kind of most important topic was learning from other successful passive investors, right? And this is what I'm actually really excited about too, because I'm very curious as well. Right.

And we got a killer lineup of very successful high net worth investors. We're going to be kind of spilling the beans on what they like, why they like it, where they've made their money and where they've lost their money. Right. You learn more sometimes from the mistakes, you know, and why make your own when you can learn from someone else's mistakes, you know? Right. So we're going to have a lot of fun. Yeah, just talking to some of these, uh, some of these folks.

Yeah, so we have a lot, a lot of great—

we have an all-star lineup here too. Yes, so it's gonna be fun.

And then the other topic that's kind of obvious and we kind of thought would be, would be one of the most interesting ones is just how do I do due diligence on these investments, right? It's, it's, I know I want to do this but I don't have the confidence to know what questions I should be asking.

Exactly, to keep from making a mistake.

And then, you know, we, we asked, you know, what's the biggest pain point? What's the biggest frustration you have in finding, you know, when it comes to investing just in general. And the number one response was, where do I find the best investment opportunities? Right. And it's difficult because there's so many voices out there. There's so many different opinions.

And there's thousands of these and there's only so much you can, you can find out by reading their pitch deck or something, you know? Right. It's like you don't really know all the, all the data.

Yeah. So I'm going to just really quickly break down a little bit of the types of topics and segments we're going to have in this, this show. So the cool thing is we're not going to just be plain vanilla, same same content every, every week, every episode. We really want to break it down, mix it up a little bit. And so, you know, one of the, one of the primary segments we're going to do, which is we just talked about, is the Passive Investor Spotlight. So this is going to be where we're interviewing another investor just like you, and they have, you know, have experience in investing in alternatives. And we just want to understand, what have you done that's worked well? What do you like? What are you looking at and seeing right now in the market? And again, what has not worked for you? What's your biggest whiff? What will you not touch with a 10-foot pole, right? We all, we want to know that. Right. So that's gonna be really fun. We have another segment called Alt Street. So this is, you know, kind of a play on words like Wall Street, Alt Street. And it's basically going to be interviewing other sponsors, operators, syndicators of different asset classes.

Kind of diving into their strategies, why they're cool, how they're, how they're defensive or aggressive and how they expect to make money, their whole, all their models. And let you, let you, you know, fall in love with these guys and agree or say I'm staying away from that.

Right. So that'll be a really fun one. Um, and then we're going to have a segment called the Billionaire Brain Trust. So this will be a fun one too. We're going to be interviewing guests that basically work with billionaires and institutional investors, right? And whether it's a chief investment officer of a family office that's seen tons of deal flow and knowing where they want to go, or talking with tax strategy experts for the wealthy. And we saw an article the other day on how much taxes the billionaires pay, right? They know how to avoid it, which, you know, if Different, different opinion on that, but the real— the reality is no one wants to pay more tax and less tax. So we're going to talk about that as well. We're going to talk about, you know, different hot trends and, you know, what are some different, you know, current financial topics that are trending and things and buzzwords you may be hearing. And I want to break some of those down and just help kind of clarify and, you know, break down some of those, some of those things that are happening. Um, then another big one is just gonna be economic, and this is one just for our own curiosity, but also to help make us smarter investors, right? Because so much of investing is about timing.

Absolutely. Absolutely. And so we've made the point in our economic updates is we want to know where the tides are going, right? When the tides are coming in, all boats float. When the tides are going out, you know, all boats, all boats drop. And so, you know, we have a passion at Aspen to understand the economic tides that are going on. And then with that data, then to correlate it to certain alternatives or strategies that are going to do well when— with those kind of tides. Yeah, because you can make money when the tides are going in, you can make money when the tides are going out, but boy, if you, if you pick wrong, you're going to lose. And, you know, so, so we want to know what time it is. And contrary to what some people say, you can, you know, timing matters, and then you can actually figure it out. Yeah, so we're gonna have fun with that.

Yeah, so, you know, cut some of the groundwork. We're gonna be in the next few episodes, we're gonna be breaking down what we call the big three, right, of alternative investing, which is real estate, venture capital, and hedge funds. And, uh, so these are kind of— we have our alternative investment continuum, right? And it's basically this, this life cycle of investors, and, you know, they start getting into alternative investments where do they start, where do they go? And, you know, at the level 1, you have kind of— this is the stock market investor, and this is where most people are at, right? According to the data we just saw, right?

Everybody's got stocks and bonds, you know, right?

And, you know, we kind of have a 1.5 here that we talk about, which is the DIY real estate investor, right? You hear about, you know, podcasts of, oh, I have all these rentals and it pays all this income and it's just so easy and I just go retire on the beach. Well, a lot of people get into that and realize it's not as passive as they want.

I did that, and I can testify it is not very passive. And, uh, My credit card still hurts from that.

So there's a lot of podcasts out there to teach you how to go invest in real estate if you want to do it actively. We're not going to be doing that. Nope. That's not, you know, of interest to our investors or about— or us. But the kind of level 2 here is passively investing in real estate. So this isn't—

this is generally the first alt that people go after because it seems to be more understandable.

Yeah, it's, it's, it's a proven track record, it's tangible asset, it's, it's shown to have performed very well over the past several, several decades. And so it's, it's, it is huge. I mean, there's so many opportunities in real estate. I mean, it's pretty much endless, right? So there's, you can spend your whole time there, but then there's other, other side of it where a lot of people kind of stop there. You know, there's private equity and venture capital. And this is something that's pretty exciting. I'm excited to dive more into this just from a little bit of exposure I've had to it as a banker, you know, and then our kind of final part of the continuum here is hedge funds, which It's a smaller subset, you know, generally relative to the other two with most institutional investors, but something still needs to be discussed. Yeah.

And the higher net worth investors, the more they're down this continuum and the more sophisticated they are, the more they're deeper into this continuum. So we're going to dive into all three of these and look at the pros and cons, pull back the veil on all these things.

Yeah, it really just is the last kind of point to make here in this episode is just at a very high level, you know, what are some of the pros and what are some of the cons of investing in alts, right? Not everything is rosy and perfect and great and always going to go up, right? There are disadvantages too, but let's talk about those. And really, you know, I referenced it earlier in kind of some research done with some financial advisors, and most advisors want to invest more with their clients' money into alternative investments. And the primary two reasons are very simple, It was, one, better returns, and two, better diversification. Uncorrelated. Uncorrelated diversification, uncorrelated returns. And those are two of the probably biggest reasons to get into these investments.

One of the things that happened during the last crash, the 2008 crash, is, and you mentioned it, but correlations all went to one. And what's that? That means that, so bonds are supposed to be uncorrelated to stocks. Well, everything went down. And, you know, and that's what happens. And so alternatives really have a lot better being uncorrelated to stocks. And so that's a huge, huge thing. If you can get both higher returns and be less correlated to the stock market and to the general economy, you're better off.

Yeah, that's a double win right there. And some of the downsides and maybe reasons that some investors shy away from this are they're worried about liquidity, right? The reality is most of these investments, you won't have a lot of liquidity.

Meaning your capital's locked up for a period of time.

Yes. And, you know, we actually had done some pretty cool research, which I think we hit in a future episode here, but Bain Company had done basically research on liquidity needs, right, for institutional investors. And what was interesting that they found was that illiquidity actually was more of an advantage than a disadvantage. And the reason was, one, most investors overestimate their need for liquidity, right? They think they need more cash on hand.

What they really need is the comfort of it, right?

It's the psychological, you know, comfort of it. And then, and then two, because investors are emotional, right, if they have liquidity and they see their portfolios drop, they'll take it at the wrong time, they exit at the wrong time, and that can have really, really bad compounding negative effects. But if you have liquidity, you can't touch it, it's locked there. Well, you kind of work through it, right? Especially in real estate, right? If you have cash flow coming in, but it's a bad time to sell, we'll just manage through it and sell when it's a better time, when it's rebounded, and you don't get out at the worst possible time. So it's, it's actually really interesting where it's kind of the inverse of what you initially think. But obviously you have to plan for liquidity, but realize that it's generally, you know, overestimating that. And then the other big thing is, right, we all heard the big the big Ponzi schemes that get all the media in a frenzy, right? And no one wants that, right? And we've talked with investors that have had those experiences, and that's no fun. No one wants to be there. And so, there is kind of less transparency in these types of investments sometimes, or just in the whole world of private alternatives in general. But that is changing. But it's still— there needs to be a good framework for understanding how do you really determine if this is a Ponzi scheme or not, right? And there's some pretty basic, simple things you can do that will give you, you know, really good sense of direction with that. So we're breaking that down in future episodes. We're really glad that you guys joined us here. Hopefully you're as excited about it as we are. And, you know, the next few episodes, like we said, are going to be breaking down each of these alternative investments at a broad level. And we're really excited. So hopefully you'll join in on future episodes here. Alright, see you soon.