Alternative Investments: Distinguishing Myth from Reality

As one of the most active alternative investment providers in Switzerland, Moonshot frequently comes across myths and misconceptions surrounding alternative investments. So today, we want to debunk the five most common misunderstandings about them.

Let's start with definitions. Alternative investments are all financial assets other than publicly traded stocks, bonds, and cash, usually referred to as traditional investments. They are often mistakenly perceived as exotic, exclusive only to the ultra-wealthy, or too volatile.

Alternative Assets under Management, USD (tn)

2020 figure is annualized based on data to October.
2021-2025 are Preqin's forecasted figures.

Where is the industry today and where are we headed? Source: Preqin

Myth 1: Alternatives are not a necessary part of your portfolio

Reality: According to research by the multinational bank HSBC, most investors (both private and institutional) in Australia, Canada, Germany, Japan, South Korea, and Switzerland have an average allocation of more than 30 percent to alternative assets. Whether in search of higher risk-adjusted returns, income, or diversification, both institutional and individual investors currently face ever-fewer opportunities for these pursuits in the traditional asset classes.

Especially during times of uncertainty, investors need to look beyond traditional asset classes for other sources of returns in order to meet their financial objectives with greater confidence. By adding alternatives to the mix, investors may enhance portfolio performance, boost diversification and reduce their overall risk. More importantly, alternative investments can help investors pursue their goals by being a source of new opportunities and expanding the investment horizon.

Myth 2: Alternative investments are only available to ultra-high-net-worth investors and institutions

Reality: There is a broad selection of offerings within the alternatives universe – and they can appeal to different types of investors. Following the recent trend of the democratization of the finance industry, companies like Moonshot allow most investors to join the number of private equity, private credit, and real estate investment opportunities starting from CHF 10’000. Some crowdfunding platforms allow participation in real estate projects with an entry threshold below CHF 500. Nevertheless, there are still some asset classes, like closed-end funds, commodities, or hedge funds that may have been restricted to qualified purchase, high-net-worth or accredited investors.

Myth 3: Alternative investments exhibit more volatility than stocks and bonds

Reality: By and large, the transactions take more effort, and due diligence is more difficult when dealing with the alternatives than it is the case with publicly traded assets. Therefore, the market is more cold-minded and less susceptible to herd mentality, irrational behavior like "panics" or "hypes". For example, there are no "market crashes" on the private markets and no "meme stocks".

Therefore alternative asset classes can exhibit less volatility than traditional investments. The combination of alternative and traditional investments enables increased portfolio diversification, less volatility, and improved risk-adjusted returns.

Myth 4: Alternative investments require long lock-up periods and are less liquid

Reality: Indeed, it may be more complicated to convert alternative assets for cash than sell stocks or bonds. This is especially relevant for non-core assets like real estate, commodities, and natural resources.

On the other hand, the liquidity of the assets is usually overvalued and might not be worth the price.

On the public market, private investors have to compete with institutions, which perform better analysis and due diligence, can push asset prices in the needed directions, and can accept lower returns to risk ratios. Thus most private investors who do not have access to the proprietary intelligence and due diligence tools will anticipate much lower returns and higher risk, having to buy assets at the price that the large institutions are already willing to sell.

Moreover, on a falling market, it can hurt investors who are not psychologically prepared and are inclined to sell on the bottom.

So, even though the alternative asset investors might not be able to sell their assets on a whim, they can receive greater yields which compensate for longer hold times the investors experience. Multiple investment companies and boutiques provide a secondary market option to their investors. As a major player, Moonshot grants its Circle members access to a bulletin board on the Moonshot platform where interested members can communicate their interest to buy or sell investments. In such case the investor’s interest to sell will be notified to other investors from the Moonshot Circle on a bulletin board on the Moonshot platform, either within the frame of purchase rights under a common shareholders agreement or otherwise pursuant to the applicable terms. The pricing mechanism and the matching between the parties have to be carried out by the parties themselves.

Myth 5: Alternative investments are just hedge funds and private equity

Reality: Alternative investing is wide-ranging and varied. Alternative investments are financial assets other than publicly traded stocks and bonds. Besides hedge funds and private equity, the most common types of alternative investments are real estate, private credit, collectibles, art and antiques, commodities, farmland, and derivatives.

Common types of alternative investments

Moonshot’s portfolio made available to its Circle members consists of a range of alternative investments possibilities, such as private equity, private credit, and commercial real estate, including such prominent companies as SpaceX, Nubank, as well as Swiss rising stars such as Piëch Automotive, electric cars manufacturer, and Synhelion, a company which converts CO₂ from the air to fuel.