If you haven’t noticed yet, the sharing economy is spreading like wild fire! We’re now able to make money lending out our cars through Rideshare, renting out a room through AirBnb, lending an office for a couple hours through Breather, utilizing our cars to make money with Uber, and raising capital for personal projects through Kickstarter.
But what about trying to gain access to private alternative investments like hedge funds, venture capital, and private equity? Only the super rich have been able to gain access so far given the minimum investment in such types of alternative investments is usually at least $250,000 – $1 million dollars. Most people don’t have that type of cash lying around. It takes millions of dollars in liquidity to be able to invest that much capital.
Crowdsourcing Helps Businesses Grow
Thanks to crowdsourcing, companies such as Sliced Investing give accredited investors access to hedge funds and other private equity investments for as low as $20,000 an investment. Kickstarter helps freelancers, small business owners, and other creatives get the resources they need to get off the ground. Another company, CircleUp, helps small businesses raise money and lets investors own a piece of those companies. CircleUp differs from Kickstarter because of this equity element. Meanwhile, Realty Mogul allows investors to get in on various commercial real estate deals from all around the country.
By leveraging the internet to pool assets together, more people than ever are able to invest in instruments that were previously only available to the wealthy.
Chocolatier Mindy Fong is an example of an entrepreneur who used crowdsourcing on Kickstarter to grow her business. She had already been making strides with her handmade chocolates and other treats when I first shared her story in 2012. And recently wanted to take things to the next level. So she made an eye catchy video and put a proposal together on Kickstarter with a goal of raising $10,000 to open her very own retail store. I happily sent in a contribution to help her reach that goal, and am thrilled to share that she did it!
Investing Like The Rich
Surely the rich are doing things right to have been able to accumulate their wealth. I think it’s worth paying attention to the ways that rich people like to invest. Their interest in alternative investments is also rather intriguing now that there are more democratic investment opportunities.
For example, let’s take a look at hedge funds. Many individuals who have accumulated a lot of wealth are invested in hedge funds. What are hedge funds you may wonder? I like to think of them as elite, hard-to-get mutual funds that have more aggressive trading strategies, typically stricter rules on who can trade them, less transparency, more complex holdings, and a lot less liquidity.
Hedge Fund Industry/Background
The global hedge fund industry has more than doubled since the financial crisis, to more than $2.8 trillion in assets worldwide, thanks to huge flows of institutional capital (pensions, college endowments, etc), investment returns and flexible business models, said a new report from Deutsche Bank’s hedge fund capital group. In December, 2014, Deutsche Bank’s hedge fund capital group surveyed 435 global hedge fund executives who collectively manage $1.8 trillion in assets.
The interesting thing about all this growth in the hedge fund industry is that performance has been difficult given we’ve been in a bull market since 2008 and hedge funds by nature tend to hedge. Only 14% of the DB survey respondents, targeted returns of more than 10%, compared to 37% last year, showing managers are continuing to lower expectations for traditional hedge fund products. This is probably a reflection that the stock markets are at record highs, and valuations are getting rich.
Despite an underperformance during the bull market, hedge funds and other alternative investments continue to be extremely popular among institutional investors such as college endowments. For example, Yale University’s ~$25 billion in assets under management currently have over a 50% allocation in alternative investments based on research conducted on Sliced Investing’s blog. Yale has been investing in alternatives for over 20 years and started off with just $3.5 billion AUM in 1990. Other massive college endowments like Harvard’s also have similarly high alternative investment allocations (16% in hedge funds, 34% in private equity). If the geniuses at Yale and Harvard are doing it, it’s probably worth taking note. 🙂
Yale University Target 2015 Asset Allocation
Private Equity: 31%
Hedge Funds: 20%
Real Estate: 17%
Foreign Equity: 13%
Natural Resources: 8%
Domestic Equity: 6%
Bonds and Cash: 5%
The main reasons why college endowments and other institutional investors invest in hedge funds (absolute return strategies) are: 1) Diversification, Volatility Dampening, and 3) Asymmetric Return Profile. The goal is for hedge funds to make you money during good times, and protect your capital during bad times.
Sharing Creates More Opportunities To Make Money
The sharing economy is allowing many of us to save money, put our underutilized assets to work, and make money through new investment opportunities that were once closed. The result of all this is more freedom to do what we want.
For example, instead of fearing you’ll run out of money if you leave your job to pursue entrepreneurship, you can sign up with TaskRabbit to run some errands, or drive your car around with Lyft when funds are running low. Instead of wondering whether your investments are going to take a big hit during the next market correction, you can diversify into alternative investments to help soften the blow.
And if you really want to take advantage of the sharing economy, there are plenty of job openings at such companies. Just spend some time visiting their website to see for yourself!
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I’ve been blogging since 2010 and it has allowed me to break free from the corporate grind to travel, work from home, consult for companies that I like, and do so many more things I’ve always wanted to do but couldn’t. The income is relatively passive as posts I’ve written years ago are still being found through Google and generating income. What’s better than making passive income and creating a valuable asset you can one day sell for a multiple of annual income? There’s not a week that goes by where I’m not thankful for starting this site!