Alternative Investors Weren't Scared Off By The Banking Crisis‍

A high-net-worth client’s investment decision can be quite challenging, because he or she may have significant amounts of money invested in complex alternative investments, making it quite a high-wire act. It was comforting to wealth manager Tom Ruggie to know that none of his clients were directly affected by Silicon Valley Bank's collapse in March when the panic started.

‍

Having used Fidelity for quite a while, Ruggie, an author and certified financial planner in central Florida, believes that he got lucky there. But when it came to credit Suisse, there was a little bit of a scare. 

‍

There have been some debt obligations worked on by Ruggie’s firms on behalf of the troubled financial institution, namely Destiny Wealth Partners, a family office firm, and Ruggie Wealth Management, a financial planning firm. Despite the fact that the contracts were all completed, Ruggie and his clients would have lost a lot of money in case Credit Suisse had failed, because they would never have been repaid for the notes. 

‍

There is a high level of risk involved with investing in private equity, hedge funds, and direct investments in start-ups, and these investors are used to taking on that risk and are able to absorb it as much as possible. An EY study indicates that one-third of individuals with assets greater than US$250,000 have some alternative assets in their portfolio, including 81% of ultra-high net worth individuals with assets exceeding US$30 million. Ruggie said that scares aren’t so common, but when they do, they are “eye-opening experiences.” 

‍

As Ruggie says, despite the fact that some of his clients would run away from ruggie when things turn bad, they are often willing to take chances when everyone else is running for cover. They tend to be more willing to take risks when others are running for cover. The situation in 2008 was very difficult for me psychologically because people do not do well with uncertainty when something comes up, but savvy investors see it as an opportunity.”

‍

Ruggie believes the high net worth investor's money is going to be put into this asset class right now. 

‍

Are there any risks involved?  

‍

Investing among high net worth individuals is not always based on alternative strategies. In Ruggie's view, the client's money is divided into three pools, short-term money is invested in fixed income, mid-range investments are primarily in stocks and mutual funds, while long-term investments are primarily based on private equity.

‍

Having said that, he states that choosing the ratio should be based on a statistical correlation of the amount of money you have with how much you require and for how long. There is no cookie-cutter solution to that question.

‍

It has been noted that Ruggie's personal portfolio is pushing 40% non-traditional alternatives, which is in contrast to some clients who are only investing 10% or less of their net worth. Moreover, a lot of the money is invested in sports memorabilia, mostly baseball cards, collectible wines, and some investments in companies, as well as sports memorabilia. 

‍

Ruggie does not recommend any of his clients to invest in non-fungible tokens (NFTs), since "I personally cannot see the advantage in investing in something like that, and wouldn't recommend it to any of my clients." 

‍

The cryptocurrency industry has been dabbled with, but Ruggie says he wanted to learn. “I did quite well, but when clients approached us for advice, we advised them it wasn’t the path we were on. Long-term performance is more important to our client base than gambling.”

‍

What is the required amount of capital?

‍

It is fairly common for direct investments into companies to be made as low as US$25,000. These are opportunities that are most appealing to Ruggie's clients right now, especially technology-based start-ups, which are the most interesting to all of his investors. 

‍

Private equity firms, which pool investments and find companies worth investing in, are also a great place for some of Ruggie's clients to put their money, which results in the firm being able to invest. Ruggie's clients typically invest a minimum of $250,000, and they have to meet qualifying criteria, including a net worth of $5 million. He also works with hedge funds, real estate, and collectibles. 

‍

A hedge fund tends to be the most liquid investment as there is typically a lock-in period of one year before you can withdraw your money, but you usually have to notify them 30 days before you do so. 

‍

As Ruggie explains, private equity is generally regarded as long-term investing, and hence I tell people to have no expectations of any liquidity at all. "In my opinion, private equity is long-term investing," Ruggie explains.

‍

As with most direct investments in companies, the ability to receive cash out of such investments depends on the company going public and the stock's value increasing, as opposed to the possibility of selling stakes on the secondary market. 

‍

Could there be a gain?

‍

There are a number of reasons why clients are attracted to alternatives investments. I believe it is largely because the potential upside of these investments is unlimited. That's what makes investing in alternatives investments worthwhile. In addition, many highly net-worth individuals have the financial means to invest. 

‍

"What defines excess for you? It's basically the difference between what you have and what you need," Ruggie explains. "There are different definitions of rich and it's important to remember that.".

‍

It is not uncommon for advisers, such as Ruggie, to have to tell their clients that they may have outperformed the market, but that, regardless of what returns they were expecting, they lost 10% or whatever it may have been for the entire year. Ruggie, however, believes it is just a temporary situation due to paper losses. 

‍

There is a whole lot more to the speech, but let me summarize what I said so far. I believe that after years of investing in alternative investments, what we are doing will outperform the market with statistically less risk than the market over a long period of time. It will catch up with the market in the end.