Alternative Assets 2.0
Until recently, only high net worth individuals have legally had access to alternative assets. By the historical definition, alternative assets are: hedge funds, private equity, and venture capital. These are "alternative" to traditional asset classes such as equities, bonds, mutual funds, and ETFs, which everyone has access to. The logic behind restricting alternative asset investing to only the wealthy is that the alternative assets tend to be illiquid, and are viewed as more risky than traditional assets. The question about whether or not this makes sense is beyond the scope of this piece. But the good news is completely new asset classes are being created that either allow or will soon allow the masses to get involved. These new asset classes certainly have their risks. But more choice is better for the masses, and if approached thoughtfully, investing in alternative assets 2.0 could produce better returns for investors than traditional assets. Below are the four different asset classes that make up "alternative assets 2.0," and a few companies in each class that are worth checking out.
P2P Lending (Lending Club, Prosper)
While many of the alternative assets 2.0 classes are highly speculative, more risk-averse folks may be attracted to yield-producing P2P lending markets like Lending Club and Prosper. At a time when bank interest rates are at or near all-time lows, investors have an opportunity to get better returns (between 5% and 12% interest) by lending money to folks who borrow for things like debt consolidation, home buying, car financing, and wedding expenses, among other things.
People (Upstart )
People is the most nascent asset class of alternative assets 2.0 and is being pioneered by a year old company called Upstart. Upstart allows people to sell shares of stock in themselves in exchange for a percentage of future revenue. Investors on the platform invest in people based on an assortment of historical data, like education, experience, and interests. This idea has been attempted before. In 2008, Minor League baseball player Randy Newsome founded Real Sports Investments to sell shares of himself. Real Sports received a lot of attention initially but flamed out pretty quickly. Upstart is taking another crack at the model, and they have a strong team and quality investors behind them.
I have been scouring this platform and have yet to pull the trigger on an investment, but plan to in the near future. The platform is straightforward and intuitive. I do wish there was more social integration though, as users shouldn't have to Google names to find Twitter and Facebook profiles.
Cryptocurrencies (Bitcoin, Litecoin)
This is an asset class that has received lots of publicity as of late. Cryptocurrencies are new forms of money that use cryptography to control creation and transactions, rather than relying on central authorities like traditional currencies (dollar, pound, etc). Bitcoin is by far the most popular cryptocurrency to date, but I expect others, like Litecoin, to emerge as well. The process for individuals to invest in Bitcoin is not incredibly difficult, with sites like Coinbase.com making it easier, but there still is some friction involved, especially in the case of Litecoin and other less popular cryptocurrencies. I expect entrepreneurs will continue to create services that will reduce the friction in investing in crytocurrencies in the future. This will positively impact the currencies in the long run.
Startups (Funders Club, WeFunder, Angel List )
Of these 4 classes, this is the one that is not yet accessible to unaccredited investors. Part of the JOBS act, which passed in 2012, says that unaccredited investors are allowed to invest in startups. This is expected to go into effect this year or early 2014. When it does, platforms like Funders Club, WeFunder, and Angel List will provide access to the private markets for the masses, creating another class of alternative assets 2.0.
What asset class in “alternative assets 2.0" are you investing in? Don’t hesitate to contact me on Twitter (@NTMoney)!