The Case for Alternative Investments

This year, we expect to see dramatic increases in both risk and volatility, particularly when it comes to traditional asset classes. As a result, “alternative investments” are expected to increase substantially as high net worth investors seek new ways to diversify their portfolios and decrease exposure to market volatility.

The term “alternative investments” includes any investment that is insulated from fluctuations in the public debt or equities markets; these can include private debt, private equity, hedge funds, and real estate, and they can act as a hedge to help protect principal against downside risk in the broader market.

Private debt, such as non-agency mortgages or unsecured loans, is one type of alternative investment. Unsecured debt (such as corporate paper) can provide important diversification to a portfolio — but it comes with risks of its own, since they aren’t secured with any hard assets.

Mortgages, on the other hand, can provide investors with a short-term, fixed-income alternative — while still offering the protection afforded by being secured to a hard asset. The WFP Income Fund, for example, pursues this strategy by investing in a diversified pool of mortgages and deeds of trust in first lien position that are secured by investment property and income producing real estate. In addition to offering an opportunity to invest in an asset class that is decoupled from the fluctuations of the stock and bond markets, the WFP Income Fund is not sensitive to interest rate changes and seeks to protect investors’ principal against downside risk through lower loan-to-value ratios on loans in first lien position.

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