Assessing risk, and Identifying scams in Alternative Investments

Question

I have recently come across several websites (such as Yieldstreet, but there are others) that offer accredited investors the opportunity to invest in "alternative investments", meaning not traditional securities (stocks/bonds/etc). I qualify as an accredited investor, but am naturally a cautious person who likes to understand the risks I'm undertaking. And in my research I'm having a hard time distinguishing between company press and more unbiased reviews of their services.

They claim to be highly uncorrelated with the market, and based on the types of offerings they have (portfolios of things like bridge loans for real-estate, pre-settlement plaintiff advances for personal injury cases, and many other types of clearly "alternative" revenue streams) I would agree that these do not remotely hold the same risks that the more traditional markets. Not the same does not mean fewer risks, just not the SAME traditional business cycle risks.

I like to do a lot of research, and usually when I hear that an investment has a 10%+ return on it I avoid it because as the old adage goes "if it seems too good to be true, it probably is". But I can't find any hard evidence out there that these are scams, or that the risks are even disproportionately high.

I am just looking for anyone who has actual experience with these types of systems, and what sort of things to look for, or look out for. I am assuming that they are legitimate investments, not some sort of Ponzi scheme, but how does one actually go about assessing the risks associated with these types of investments?

Answer 1

I have personally invested $5,000 in a YieldStreet offering (a loan being used by a company looking to expand a ridesharing fleet), and would certainly recommend taking a closer look if they fit your investment goals and risk profile. (Here's a more detailed review I wrote on my website.)

YieldStreet is among a growing crop of companies launched as a result of legislative and regulatory changes that began with the JOBS Act in 2012 (that's a summary from my website that I wrote after my own efforts to parse the new rules) but didn't fully go into effect until last year. Most of them are in Real Estate or Angel/Venture, so YieldStreet is clearly looking to carve out a niche by assembling a rather diverse collection of offerings (including Real Estate, but also other many other categories). Unlike angel/venture platforms (and more like the Real Estate platforms), YieldStreet only offers secured (asset-backed) investments, so in theory there's less risk of loss of principal (though in practice, these platforms haven't been through a serious stress test).

So far I've stuck with relatively short-term investments on the debt crowdfunding platforms (including YieldStreet), and at least for the one I chose, it includes monthly payments of both principal and interest, so you're "taking money off the table" right away (though presumably then are faced with how to redeploy, which is another matter altogether!)

My advice is to start small while you acclimate to the various platforms and investment options. I know I was overwhelmed when I first decided to try one out, and the way I got over that was to decide on the maximum I was willing to lose entirely, and then focus on finding the first opportunity that looked reasonable and would maximize what I could learn (in my case it was a $1,000 in a fix-and-flip loan deal via PeerStreet).

Answer 2

10 to 20% return on investment annually. "When I hear that an investment has a 10%+ return on it I avoid it because...". In my opinion, and based on my experience, 10% annually is not an exageration. I start to ask questions only if one talks about return of 30% annually or more. These kind of returns are possible, but very rare.

What sort of things do we need to look out for with alternative investment? First the quality of the website and the documentation provided. Then the resume of the founders. Who are those guys? I check their LinkedIn profile. If they have none, I am out. A LinkedIn profile is a minimum if you manage an investment company. I also look for diversification and this is the case with Yieldstreet.

How do we assess the risks associated with alternative investments? I would never put more than 10% of my capital in any investment, alternative ones included. I also try to find financial information on the promoter itself. In Yieldstreet case check the legal advisor.

I remember an international fraud case I analyse. The promoter I investigated had seven small trust involved: in British Virgin Islands, in Panama, in Holland, in Portugal, in the United States and Canada plus a banking account in Switzerland and the biggest shareholding company in the Isle of Man. No need to talk about what happened after. The investors were all non residents in the juridictions involved and no legal recourse were possible. They lost everything. These promoters regularly change juridictions to avoid detection.

As far as Yieldstreet is concerned, what I read and checked seems interesting. Thanks for your question. I will check it out myself more. I am also a very cautious investor. To evaluate alternative investments is difficult , but no need to be afraid or to avoid them. We are accredited investors after all.