How Advisors Can Optimize Client Portfolios Using Alternative Investments

August 2, 2022

AUTHOR: ADMIN

Alternative investments are a broad group of assets that do not fall into a traditional investment category, such as stocks, bonds, or cash. Examples of alternative investments include private equity, commodities, derivatives, hedge funds, and real estate. Alternative investments are primarily held by institutional or accredited investors, although there are growing opportunities for retail investors as demand continues to rise. While each subcategory of alternative investments will offer its own unique set of benefits, some of the common reasons financial advisors would recommend alternative investments to their clients may include:

Increase portfolio diversification
Capitalize on opportunities not available or easily accessible to the public
Attain specific tax benefits

Let’s dive into each of these a bit further.

Increase Portfolio Diversification

Portfolio diversification is an often–discussed risk management tool based on the adage “don’t put all your eggs in one basket.” While the appropriate level and application of diversification will vary for each individual investor, the broad theme involves investing across several different asset classes, securities, geographies, etc. However, one could conceivably invest in a portfolio of securities that is spread out across each of the aforementioned factors, but still not achieve adequate diversification if each asset is significantly correlated to each other. This is where alternative investments come in. Alternative assets are usually either non–correlated or inversely correlated to traditional investments, so by adding alternatives to an investor’s portfolio, an investor can better reduce portfolio volatility and diversify away systematic risk.

Capitalize on Opportunities Not Available or Easily Accessible to The Public

Most Canadian financial advisors work with retail investors, and retail investors have traditionally been excluded from, or had a very difficult time investing in, opportunities such as commercial real estate, private lending, natural resource exploration, and other private market deals that were traditionally the domain of institutional investors. In recent years, however, alternative investments have become more accessible to the Canadian retail market through certain exempt market securities such as REITs, private equity funds, flow–through funds, and more. These structures pool the assets of various retail investors, which enable them to collectively invest in big–money investments such as commercial real estate, or an equity stake in a private company.

Attain Specific Tax Benefits

Many alternative investments can provide investors with various tax benefits, making them a favourite
tool for many advisors when it comes to tax planning. For example, many REITs or other real estate
funds can provide a portion of their distributions in the form of Return of Capital, which is not considered a taxable event and therefore not taxed as income. The same can be said for certain private lending funds.

Other alternative investments provide unique tax benefits, such as flow-through funds. Not only are the initial investments into flow-through funds 100% tax deductible (in some cases even more than 100%),the proceeds upon disposition of the fund are taxable as capital gains. This unique, transformative feature effectively means investors can convert income earned today into future capital gains, making flow-through funds a valuable tax-planning tool for advisors.

Disclaimer

The information provided is general in nature and is provided with the understanding that it may not be relied upon as, nor considered to be, the rendering of tax, legal, accounting, or professional advice. Readers should consult with their own accountants and/or lawyers for advice on the specific circumstances before taking any action. Accilent Capital Management Inc. (“Accilent”) is the investment manager to the Pavilion Flow-Through L.P.s (collectively, the “Funds”). This document is for information purposes only and should not be relied upon as investment advice. We strongly recommend that you consult your investment professional for a comprehensive review of your personal financial situation before undertaking any investment strategy. Information herein is subject to change without notice and Accilent is not responsible for any inaccuracies or to update this information. The information contained herein does not constitute an offer or solicitation by anyone in the United States or in any other jurisdiction in which such an offer or solicitation is not authorized or to any person to whom it is unlawful to make such an offer or solicitation. Prospective investors who are not resident in Canada should contact their financial advisor to determine whether securities of the Funds may be lawfully sold in their jurisdiction.

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