What constitutes an alternative investment? Phil emphasized that the category is fluid and constantly evolving.
“It’s less about what something is, and more about what it isn’t. And I often think of it in terms of ‘who is it an alternative for?’ The definition is often in the eye of the beholder.”
Alternative investments challenge traditional categorizations like stocks, bonds, or cash, offering investors unique opportunities beyond the mainstream.
Phil explained that the defining attributes of alternative investments can vary depending on the investor’s perspective. For some, alternatives might be Bitcoin or venture capital; for others, they could be private equity or real estate. The key is understanding that alternatives are not confined to a rigid definition and can encompass a wide range of assets.
“This is an evolving definition. Over time, as things become more mainstream, they stop being alternative and become more traditional. But a few different variables affect this definition.”
Phil focuses on three factors he believes impact this definition: liquidity, implementation, and packaging. The first is liquidity, like public versus private equity. It’s all equity risk. It’s just a different access point. A lot of shared economic risk is involved, which is the key differentiating feature.
He then discusses the concept of alternative investment implementation, giving an example of value investing to illustrate how the same investment strategy can be implemented differently, each with unique characteristics and risks.
“Everyone is familiar with the idea of buying something cheaper than its fundamental value. You can implement long-only, buying undervalued stocks and holding them long-term. You can implement it quantitatively in a long-short way by buying undervalued stocks and simultaneously selling overvalued ones. This strategy aims to extract the market beta and be left with that value factor exposure.”
Phil rounds out the trio with the third factor – packaging. He compares it to “old wine and new bottles” in the sense that older strategies or ideas can be presented or used differently over time. Recently, they’re becoming more widely accessible to a larger audience of investors through innovative structures like interval funds.
“At the end of the day, the objective is to build portfolios that consist of a diverse mix of risk premiums and ways to make money. If we can find a way to make alternatives less alternative, we can think about what we want to achieve, and that will lead to better outcomes.”
