Exploring Alternative Investments in Secondary Markets: Opportunities and Risks

Beyond stocks and bonds, secondary markets are now seeing trade in alternative assets like cryptocurrencies, collectibles, and private equity funds. These markets remain relatively niche but are expanding rapidly as technology enables new platforms and fractional ownership models. For investors, alternative investments can provide portfolio diversification, high returns, and early entry into new assets – but also carry higher risks.

Cryptocurrencies and Tokens

Secondary market trading volume in cryptocurrencies like Bitcoin and Ethereum has exploded, crossing $15 billion daily. Cryptocurrency exchanges like Coinbase provide an easy means to trade hundreds of cryptocurrencies. Blockchain-based tokens representing assets like real estate (REITs) and commodities are also emerging. For investors, cryptocurrencies offer potential gains from major price swings, while tokens open up fractional investing.

However, crypto assets come with high volatility risks due to speculation and lack of intrinsic value. Lack of regulation also means higher fraud risk and market manipulation. Institutional investors are still wary of reputational risks from crypto associations. But growing adoption is making cryptocurrencies an alternative asset class that provides digital, decentralized alternatives to traditional currencies and securities.

Collectibles and Artwork

Collectibles like fine art, vintage cars, wine, and memorabilia have seen secondary markets thrive through auction houses like Sotheby’s and online platforms. Fractional investing apps are now allowing retail investors to own shares in collectibles like sports cards and rare books. For high-net worth individuals, collectibles remain an important alternative asset class that provides portfolio diversification and acts as an inflation hedge.

Returns have also been strong with collectibles tracking indices like the S&P 500. However, collectibles carry risks like high transaction costs, appraisal subjectivity, authentication fraud, and illiquidity with uncertain exit strategies. Investments are often passion-driven rather than return-focused, so due diligence is essential.

Real Estate and Mortgages

Though not as liquid as public REITs, secondary markets for private real estate partnerships and pre-IPO shares allow accredited investors access to institutional quality real estate. Platforms like RealX and Securitize offer fractional investing at low minimums. Mortgage-backed securities trading drove growth of the secondary market for loans and mortgage servicing rights.

This provides expanded investor access to the real estate sector. However, private real estate investments come with lower liquidity, higher fees, and higher risk compared to publicly traded REIT shares. Complex due diligence is essential given opaqueness. The mortgage market remains prone to volatility too. But for suitable investors, real estate secondary markets provide expanded opportunities.

Infrastructure and Project Finance

Infrastructure project finance deals were historically difficult to access for non-institutional investors. But platforms like InfraShares now enable accredited investors to buy and sell stakes in infrastructure projects like renewables and transportation. Returns derive from the long-term contracted nature of projects, often linked to inflation, making them attractive substitutes for bonds. Moreover, the secondary market provides earlier liquidity.

However, regulatory complexity around infrastructure investing persists. Due diligence challenges also exist in assessing project cash flow stability. But the space offers diversification from stocks and real estate.

Private Funds and Startup Equity

Venture capital and private equity fund interests are now traded on secondary market platforms like Forge Global before typical 5-7 year exits. This provides investors earlier liquidity and ability to rebalance portfolios. Startup equity is also increasingly traded privately between current and former employees, accredited investors, and funds.

ICMA noted for investors, such alternatives offer access to investments with potential for higher returns compared to public markets. But liquidity still remains a key constraint alongside due diligence barriers, high investment minimums and regulate uncertainty around platforms. Secondary markets are making these investments more accessible but need to evolve further.

Evaluating Alternative Investment Platforms

A vibrant ecosystem of secondary market platforms has emerged to trade alternative assets. Evaluating these platforms requires assessing aspects like:

  • Asset Class Access – Platforms offer different exposure including crypto, real estate, art, private equity, infrastructure. Assess range of assets and fractional ownership available.
  • Investor Qualification – Many platforms limit participation to accredited or qualified investors only based on net worth and sophistication tests. Check qualification requirements for access.
  • Due Diligence – More complex assets require deeper due diligence of valuation methodology, authentication, ownership rights, volatility etc. Evaluate transparency.
  • Liquidity Provisions – Secondary trading still comes with lower liquidity in alt assets compared to public stocks. Check ease of exit mechanisms like buyback guarantees auction processes.
  • Trading Mechanisms – Platforms offer different trading methods including bilateral negotiation, auctions, automated matching. Check model efficiency and transaction costs.
  • Technology Capabilities – Advanced platforms invest in AI, blockchain, digital warehousing of assets etc. to gain a competitive edge. Assess the tech value add.
  • Geographic Scope – Some platforms operate across borders while others focus regionally. Assess platform footprint and regulations covered.
  • Security & Compliance – With higher fraud risk, evaluate cybersecurity protections, investor fund custodianship, KYC procedures and compliance auditing.
  • Funding & Corporate Backing – Evaluate financial and corporate backing for the platform itself as viability assurances. Wide adoption requires strong capitalization.

Thorough vetting across these parameters is key for assessing platform stability, security, and usefulness for enabling secondary trading in alternative assets. The space remains fragmented, so investors have to do more homework compared to public market platforms.

Key Takeaways and Future Outlook

Some key points for investors exploring secondary market alternatives are:

  • Conduct extensive due diligence before investment given asset complexity, lower transparency, and liquidity constraints.
  • Maintain a portfolio view on allocation to alternatives – don’t let them dominate given risks.
  • Utilize platforms with robust security provisions, liquidity mechanisms and compliance procedures.
  • Factor in higher transaction costs and fund minimums before entering some of these niche markets.
  • Track evolving regulations which balance secondary market access with investor protections.

Looking forward, alternatives are likely to occupy a greater slice of secondary market activity as investor comfort grows and platforms innovate around fractional ownership, blockchain, and digital assets. New alternative asset classes may also emerge. While risks persist, increased diversification and portfolio return potential make this space promising under prudent evaluation. As always, investor qualification, due diligence, risk management and measured exposure is vital with alternative secondary market opportunities.

Final words

Alternative investments can enhance portfolio diversification and yield for suitable investors who have the appetite for higher risk and illiquidity. However, thorough due diligence is vital given the complexities around valuation, authenticity, volatility, and fraud risks. Regulations are also evolving to balance innovation versus investor protection. While returns can be lucrative, alternatives should still represent a smaller component of investor portfolios given their risks. But they unlock new opportunities in secondary markets that offer exposure beyond traditional stocks and bonds.


Posted

in

by