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Guest Contributor: Best of Both Worlds – Bonds as an Alternative Asset Investment

By: Matt Leiter, Chief Financial Officer, Trilogy Real Estate Group

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By: Matt Leiter, Chief Financial Officer, Trilogy Real Estate Group

Mention the words “traditional asset class,” and the three investment categories that come to mind are stocks, bonds and cash. In the meantime, the “alternative asset class” is defined as every other investment that doesn’t fall into those buckets. Specifically, alternative asset classes include precious metals, collectibles, currencies, commodities, private equity, hedge funds and real estate.

As alternative investment returns tend to have a lower correlation to the standard asset classes, they are increasingly being used as key diversifiers to both help offset market volatility and generate higher returns, especially during periods of low yields. However, sourcing, understanding owning and selling these investments can create its own set of challenges.

The good news is that, under certain situations, a more traditional asset class — such as investments structured as bonds — can be used within the framework of an alternatives allocation — such as real estate. Such investments can combine the higher returns and diversification attributes of an alt asset, with the familiarity and transparency of its more traditional counterpart.

Considering the Traditional Asset Benefits

While alternative assets can provide the plethora of advantages outlined above, the onerous investment process, suitability restrictions and real or perceived exoticness can deter individuals from funneling their financial resources into real estate or precious metals. However, bonds used within the focus of alternatives allocation can help reduce the challenges inherent in acquiring and owning alternative assets, while providing many benefits.

Investor protections. Bonds typically offer covenants and/or indentures that represent the bondholder’s interests by detailing the rules and responsibilities that each party must adhere to.

Defined term. Bonds offer an investment deadline, known as the maturity date. This time limit eliminates the moving target inherent with many alternative investments and the return of investor principal.

Steady returns with upside potential. Returns offered by alt assets can be highly variable. For instance, distributions from non-traded REITs are dependent upon the board’s decisions and income from investment properties. An unfavorable interest rate environment and a relatively higher fee structure can result in a negative cash flow, leaving no money left for income distribution to investors. But bonds pay a stated coupon rate, regardless of asset performance. Additionally, in the case of asset-backed bonds, they can be structured to enhance total return with access to “sweeteners” like contingent interest based on the underlying asset performance.

Ease of purchase. Individuals attempting to invest in certain alternative assets can run into the following challenges:

  • Suitability. Many times, only accredited investors can quality for hedge funds, private placements and private equity investments. But bonds, especially those packaged through a Reg A offering, can be available to non-accredited investors.
  • Red tape. Private placements and non-traded product investments require the submission of reams of paperwork before purchase. Because bonds are considered traditional investments, they can be readily purchased with simple one-page order forms.
  • Availability. Bonds are widely available on common electronic platforms allowing investors and investment professional to find and purchase directly from major platforms including, but not limited to, Schwab, TD Ameritrade and Fidelity.

Transparency. Many alternative investments provide little to no financial reporting which can make it difficult to understand how an investment is performing. But bonds packaged within a Regulation A offering must file audited financials with the Securities and Exchange Commission on a regular basis. This allows investors to obtain a good idea of operations, returns and other factors that are crucial to effective decision-making.

Blending the Alternative with the Traditional

Well-packaged bonds can marry the best of fixed income and alternative investing to provide bondholders with diversification, inflation protection, insulation from market volatility and attractive risk-adjusted returns.

Matt Leiter is the chief financial officer for Trilogy Real Estate Group, where he leads the company’s capital markets strategy. Mr. Leiter has filled senior executive roles in real estate development and investment arenas for more than 20 years and has structured, launched and overseen the distribution of 14 investment funds including 1031 Delaware statutory trusts, mezzanine debt offerings, opportunity zone funds, preferred equity offerings and the first Regulation A Tier II real estate bond funds. As a real estate developer, Mr. Leiter entitled and developed more than $350 million in multifamily and mixed-use development projects.

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The views and opinions expressed in the preceding article are those of the author and do not necessarily reflect the views of The DI Wire.