4 Things to Know About Alternative Investments

 

Alternative investments encompass choices other than traditional stocks, bonds or cash. While the reasons for investing in high yield funds, an exchange traded REIT or pooled mortgage fund may vary; there is a common objective to separate returns from broad market forces.

For instance, trust deed investments provide high yields with monthly cash flow that is buffered against macro factors that affect mortgage backed securities, such as interest rates. Similarly, a pooled mortgage fund holding trust deeds to maturity may provide a stable net asset value (NAV) compared to open-ended high yield mutual funds and real estate investment trusts.

Here are 4 Things to Know About Alternative Investments:

  • Correlation
  • Structure
  • Liquidity
  • Cash Flow

Correlation

Looking for investments that ‘zig’ when the market ‘zags’? Many investors turn to international equities, foreign bonds or high yield investments to reduce portfolio correlations. However, these asset classes are also prone to rise and fall with market sentiment. The strength of the U.S. dollar, Fed Rates and trade agreements all affect the attractiveness an overseas bond or equity. High yielding REITs may suffer NAV drops as investors redeem shares due to changes in the real estate market, as new issues with higher coupons compete for investment dollars and/or simply fear.

While an Equity REIT or mortgage backed securities may have a place in your portfolio; investors can further diversify with less correlated choices.

This includes buying trust deed investments or investing in a pooled mortgage fund. Each offers large spreads to treasuries that are less sensitive to interest rate risk than mortgage backed securities and other fixed income investments.

Why? Some borrowers avoid traditional capital markets in favor of shorter term financing. This segment must then turn to alternative financing to secure bridge loans on their desired properties. The rates set on these loans with shorter maturities do not compete with banks and traditional sources of capital, which provides an attractive yield that is less sensitive to rate changes.

Income investors may use a laddering strategy through trust deeds to buffer their interest rate risk even further, or turn to a managed portfolio, such as the WFP Income Fund. Annualized returns of 7-8% can be achieved through investing in individual trust deeds or via pooled mortgage funds.

Structure

Investor psychology affects risk tolerance and portfolio choices. Securitized investments have NAV fluctuations that make many income investors uncomfortable. The flexibility to adapt with market changes could also be limited as these securities must redeem shares and meet other obligations. Moreover, enthusiasm behind strong job growth and housing demand which may drive higher valuations is curbed by memories of the financial crisis from 2007-2008.

Solutions? Accredited investors may turn to privately issued alternative investments for a stable NAV. Unlike publicly traded MBS or Equity REITs; the NAV of privately issued pooled mortgage funds may not fluctuate with supply and demand for shares. This is particularly true for REIT alternatives that hold trust deeds to maturity.

Accredited investors may consider the WFP Income fund to complement exchange traded securities to reduce the NAV volatility of their portfolio.

Cash Flow

Portfolio income provides fuel for dollar cost averaging or simply supports your daily lifestyle. Aside from yields, income investors should also consider the frequency of interest payments. Sources of cash flow include dividend paying stocks, high yield mutual funds, REITs and mortgage backed securities.

An active investor or those needing income to budget their lifestyle often prefer monthly payouts. Those seeking yield mostly as a diversification tool could accept quarterly cash flow.

Trust deeds, mortgage backed securities and pooled mortgage funds are among the choices for monthly interest payouts. Risk averse investors in particular may turn to privately held trust deed investments or privately issued pooled mortgage funds to help minimize NAV volatility and earn monthly interest secured by loans with low loan-to-values secured by a hard asset as collateral – real estate.

Liquidity

Selling a holding quickly provides peace of mind. Exchange traded securities or open-ended mutual funds are readily converted into cash, whereas trust deeds are more illiquid.

Time horizon, yield and psychology may each affect which alternative investments are suitable for portfolios. Trust deeds with shorter maturities and monthly cash flow may offset liquidity concerns, while the ability unload or scale back positions in long maturity bonds may be considered vital.  Nevertheless, a diversified portfolio may contain each of these instruments because of the very nature of their distinct attributes.

Ready to learn more about how alternative investments can enhance your portfolio? Contact Wilshire Finance Partners at (866) 575-5070.

 

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* ADDITIONAL DISCLOSURES:

The information contained on this Website (the “Overview”) is not an offer to sell or the solicitation of an offer to purchase trust deed or mortgage investments, or the securities of the WFP Income Fund, the WFP Opportunity Fund or other securities or investments (individually and collectively, the “Investments”) offered through Wilshire Finance Partners, Inc. (“Wilshire”). The purpose of this Overview is to provide an overview of one or more Investments and its private placement. Persons interested in learning about one or more Investments and their private placement will be provided with the Private Placement Memorandum, Operating Agreement (as applicable), Subscription Agreement and other related documents (collectively and inclusive of exhibits and any supplements thereto, the “Memorandum”) prepared by Wilshire, which provides a description of the particular Investments, the terms of the private placement, a discussion of risk factors, and other information related to such Investments. To the extent that there is any inconsistency between the information provided in this Overview and the Memorandum, the Memorandum shall control. This Overview and the Memorandum contain certain forward-looking statements regarding the Investments. The forward-looking statements are based on current expectations that involve numerous risks and uncertainties which are difficult or impossible to predict accurately and many of which are beyond the control of Wilshire’s management, including, but not limited to, national and international economic conditions, changes in legislation, and other factors that can disrupt economic stability. Although Wilshire believes that the assumptions underlying the forward-looking statements are reasonable, any of the assumptions could prove inaccurate and, therefore, there can be no assurance that the forward-looking statements will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements, the inclusion of such information should not be regarded as a representation by Wilshire, any placement agent, or any other person, that the respective objectives and strategies of investing in one or more Investments will be achieved. Investments be made solely by accredited investors (which for natural persons, are investors who meet certain minimum annual income or net worth threshold), who are provided with the Memorandum and who complete, execute and deliver the subscription documents included therein. The Investments are securities and each of the Investments are being offered in reliance on an exemption from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”), provided by Regulation D, Rule 506(c), and are not required to comply with specific disclosure requirements that apply to securities registered under the Securities Act. Neither the Securities Exchange Commission nor any state securities regulator or agency has passed upon the merits of or given its approval to the securities, the terms of either offering, or the accuracy or completeness of any offering materials. As securities offered in an exempt transaction, each of the Investments are subject to legal restrictions on transfer and resale and investors should not assume they will be able to resell the Investments. Past performance is not indicative of future results. The Investments involve substantial risk, including loss of investment, and is not suitable for all investors. Loans are made by Wilshire Finance Partners, Inc., Bureau of Real Estate Broker’s License number 01523207. Loans made by Wilshire Finance Partners, Inc. outside California will be made pursuant to licenses, authorizations or exemptions in each other state.

 

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