By Xavier Brenner Investing in the coolest technology startups and other promising young companies is no longer just the playground of the super-rich. These days ordinary investors can invest in venture capital, private equity and angel funds that seed startups. These so-called alternative investments can help average retail investors diversify their portfolio's risk exposure away from traditional equity and fixed income asset classes.
Alternative advantage Alternative investments are often uncorrelated to broad moves in the stock and bond markets. So if the stock market takes a dive, the alternative asset part of your portfolio may possibly be less impacted. That said, investing in alternative investments isn't for everyone. First off, startup investing is by nature volatile and sometimes requires higher minimum investments and fee structures than mutual funds and ETFs. Proceed with caution: While they are subject to less regulation, business development investors, be they private equity or angel funds, don't always publish verifiable performance data. That said, here are some ways to play the startup game.
Angel investingSimply put, angel investors extend startups money for a piece of the action, usually equity. The angels tend to be high net worth individuals and meet the Securities & Exchange Commission's income requirements ($1 million net worth and $200,000 or more base salary) for accredited investors. Another option are angel syndicates. These investing groups pull money together and invest in a handful of startups. With a syndicate, the investing risk is spread over a larger group and the investment is smaller than if you were funding a startup by yourself. Though the returns can be substantial, angel investing requires time, expertise and due diligence to do right.
Private equity Another way to gain exposure to the startup world is through private equity firms.
Most firms don't take retail investments. So one option is to invest in exchange traded funds that replicate the performance of a globally listed private equity index.ETFs such as the PowerShares Global Listed Private Equity Portfolio (PSP) and the ProShares Global Listed Private Equity ETF (PEX) invest in both private equity firms and business development companies like Ares Capital (ARCC) and Apollo Investment (AINV).
Hedge funds A number of hedge fund invest in startups as well, but are difficult for retail investors to access. That's why hedge fund ETFs such as the IQ Hedge Multi-strategy Tracker (QAI) and ProShares Hedge Replication (HDG) have become an popular alternative to actual hedge funds. Reason? The fees are lower. And investors can simply sell the ETF rather than deal with the redemption feeds and withdrawal restrictions that come with traditional hedge funds.
Takeaway? Startup investing isn't for everyone. It's risky, requires research and can tie up a fair amount of capital. However, it can be an effective way to diversify your portfolio away from a heavy reliance on stocks and bonds, especially if you use ETFs to lower your risk exposure. Used judiciously, alternative investments can strengthen your portfolio.
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DISCLAIMER: The investments discussed are held in client accounts as of November 30, 2014. These investments may or may not be currently held in client accounts. The reader should not assume that any investments identified were or will be profitable or that any investment recommendations or investment decisions we make in the future will be profitable. Past performance is no guarantee of future results.
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