All posts by Financial Independence Hub

The Alternative Bonanza

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Photo courtesy Creative Commons/Outcome

By Noah Solomon

Special to the Financial Independence Hub

 

Over the past 20 years, there has been a propensity for both institutional and individual investors to diversify aggressively no matter what the consequences. A major part of this push has involved increasing allocations to alternative investments, ranging from hedge funds to private equity to venture capital to private debt to real estate.

In my latest commentary, I analyze both the hedge fund and private equity (PE) industries, which have been large beneficiaries of the shift into alternative investments. Specifically, I will discuss whether they have been successful in producing their intended objectives. Importantly, I recognize that there has and will always be a tremendous difference in performance between individual funds and investments and have limited my observations to generalizations on these asset classes as a whole.

Hedge Funds: from Alfred Winslow Jones to $4.8 Trillion

While writing an article for Fortune Magazine in 1948, investing pioneer Alfred Winslow Jones had the unique idea of managing the risk of holding long stock positions by selling short other stocks and using leverage to boost portfolio returns. In 1949, he raised $60,000 from four friends, added it to $40,000 of his own money, and began the first “hedge fund.” In 1952, Jones opened the fund to new investors. He also added a 20% incentive fee as compensation for himself as manager whereby he would receive 20% of any profits generated by the funds (this idea was based on the practice of Phoenician merchants who kept one-fifth of profits from successful voyages).

Hedge funds have come a long way since Jones’ time. They have been a large beneficiary of the shift into alternative assets. According to BarclayHedge, over the past 20 years ending December 31, 2021, hedge fund assets under management grew from $370 billion to $4.8 trillion.

The Emperor has No Clothes

Given the explosive growth in hedge fund assets, most people would be surprised by the investment performance of the hedge fund industry. As the following table demonstrates, on average hedge funds have neither produced attractive returns nor have they provided effective diversification from public equities.

Hedge Fund Returns: Past 20 Years Ending July 31, 2022

 

Over the past 20 years ending July 31, 2022, the HFRX hedge fund index had an annualized rate of return of 1.8%, as compared to 8.5% for the MSCI All Country World Stock Index. Moreover, the HFRX Index lagged the 3.3% annualized return for the Bloomberg Global Aggregate Bond Index while producing similar volatility.

Hedge funds have also come up short from a diversification perspective. The correlation of the HFRX index to global equities has been 78.8% while that of bonds has been only 22.9%. In other words, over the past 20 years bonds have provided both higher returns and better diversification than hedge funds.

With standard annual fees of 2% of assets and 20% of profits, hedge funds distinguish themselves more as a compensation structure than as an asset class. According to Warren Buffett, “A number of smart people are involved in running hedge funds. But to a great extent their efforts are self-neutralizing, and their IQ will not overcome the costs they impose on investors.”

Private Equity: Not as Advertised

Another big beneficiary of the push to enhance returns and/or lower overall portfolio volatility has been the private equity industry.  Investors are told that these private equity funds produce superior returns, while providing portfolio diversification. As a result, private equity has become the hottest home for a variety of sophisticated institutions and individuals. Since 2017, investors have poured more than $1 trillion into PE funds. According to McKinsey, this amount dwarfs the amount of cash directed to venture capital, real estate funds, private debt, hedge funds and just about any other form of alternative investment.

Like hedge funds, PE firms have been hard-pressed to deliver their stated objectives. Michael Cembalest, the chairman of market and investment strategy at J.P. Morgan Asset Management, stated, “Since the financial crisis, the industry has had a tougher time outperforming public equity benchmarks.” Continue Reading…

4 ways Life Insurance can fund Retirement

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Image by unsplash: James Hose jr

By Lucas Siegel

Special to the Financial Independence Hub

The infamous retirement crisis that’s been talked about for years just became real, with inflation and interest rates reaching record highs in the past few months. Consumer prices skyrocketed by 9.1% as of June 2022, the largest increase we’ve seen in 40 years. Couple that with a growing senior population living off a fixed income, many of which retired early during the pandemic, and you have yourself a massive problem.

Most senior Americans are unaware that their life insurance policy could be one of their most valuable liquid assets. Contrary to popular belief, life insurance isn’t just a way to care for loved ones after you die through the death benefit. In fact, permanent life insurance policies can also be used to access funds for retirement planning and healthcare when you need it most. Life settlements are legal throughout the US and regulated in all except six states, as well as the provinces of Quebec and Saskatchewan in Canada.

Regardless of age or financial standing, understanding the true value of your assets is essential to living out the retirement you deserve. Check out the following four ways you can use your life insurance policy to help fund retirement:

1.)   Sell your life insurance policy through a life settlement

For millions of Americans who own a life insurance policy, selling it through a life settlement can be a great way to access cash when it’s most needed. A life settlement involves selling a life insurance policy for lump-sum cash payment that is more than the cash surrender value, but less than the death benefit. Despite decades of industry innovation and growth, some 200 billion dollars[US$] in life insurance is lapsed each year that could have been sold as a life settlement.

While the life settlement process once took two to four months, AI technology has expedited the process, making it easier than ever the get a life settlement valuation. Policyholders can now use a free life settlement calculator to instantly see how much their policy is worth based on a few simple questions. Just as you track the value of your house on Zillow or your car on Autotrader, understanding the value of your life insurance policy is critical to make the best financial decisions for you and your family.

2.)   Obtain the cash value from a permanent policy

When you pay your premium on a permanent life policy, only a portion goes toward covering the cost of your life insurance. The remainder of these payments goes into an investment account where cash value can grow on a tax-deferred basis. As you age, you’ll also eventually be able to tap into the interest earnings from this investment account to help keep your policy active, thus bringing down your out of pocket premium payments. Essentially, the money in this account can be treated as emergency savings with tax advantages.

3.)   Borrow from your policy through a loan

Americans with whole life insurance that have accrued enough cash value to cover the debt can also use their policy as collateral through a whole life loan program. One major benefit is the interest rate will be much lower than what you’d see with credit card debt or an unsecured personal loan. This allows the policyholder to get a one-time, tax-free distribution that can be paid off with interest in life, or be withdrawn from your life insurance policy’s death benefit. Retirees might be able to go through their insurance carrier if whole life loans are offered, or utilize a third-party whole life loan program instead. Continue Reading…

How the Metaverse could improve the Canadian banking experience

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By Gary Teelucksingh, CEO, Capco Canada

Special to the Financial Independence Hub

The metaverse. It’s become somewhat of a buzzword: especially when it comes to financial service industries such as banking; however, it’s often misunderstood. To truly understand the various applications of the metaverse as it relates to streamlining the banking experience for Canadians, we need to get a solid lay of the land first.

The metaverse (also known as Web3 or XR) is a digital “world” driven by mixed reality (MR), augmented reality (AR), virtual reality (VR), and blockchain. For the purpose of this conversation and future-of-banking purposes, we will focus our attention on the immersive virtual reality (VR) element that to put it quite simply, will offer new ways for society to interact. With that, the metaverse that we know today can be accessed by VR headsets but is by no means one specific place. Rather, it is a vast range of “places” and “worlds” brought together by a variety of technologies, for which a grand unifying platform has yet to be defined.

Because the metaverse brings together a mix of technologies that can be deployed for a variety of different use cases, it can be difficult to truly identify how it can best be leveraged for different industries. This challenge is also a great opportunity. It’s an opportunity for financial service industries to get creative, think outside the box, and eventually serve both their employees and customers in more effective ways.

Changing the Banking Experience

Despite still being early days of the metaverse, it has become advanced enough to garner attention globally. Some trail-blazing organizations have already begun to experiment and identify the possibilities that could potentially impact the banking experience:

  • VR portfolio reviews: allowing depth of visual capabilities otherwise unimagined
  • Virtual brand access: offering news ways to engage with new or existing customers
  • Real-time translation: providing global comprehension and immediate removal of language barriers
  • Access to financial literacy educational seminars: providing extensive access to materials for all consumers, from anywhere
  • VR-based investor conferences: allowing access from anywhere, such as Morningstar’s 2021 conference

So … Where to Start?

To better understand the metaverse, my advice is simple: do not expect to understand until you have donned a VR headset and experienced it for yourself.

Continue Reading…

Bid, Ask, Spread: 3 Stock Market terms Investors should know

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By Charles Qi, CFA 

Special to the Financial Independence Hub

Stock market traders use a lot of jargon. Terms like “haircut,” “candlestick,” and “circuit breaker” are commonplace in the trading community, but for the average investor, not so much.

For the most part, knowing the meanings of these terms is not critical. However, there are some terms used by traders that investors should know and understand well because they’re used on a regular basis. So, in this article, I’ll share what I consider to be some of the most important terms to know when it comes to investing: bid, ask, and spread.

Bid: The highest price a buyer will pay for a stock

A trader seeking to purchase a stock or other asset will make their intent known by placing a “bid.” The bid represents the highest price the buyer is willing to pay for the stock. Establishing a bid is not only important for the buyer, but also the seller: the range of bids from interested buyers helps sellers determine how much market interest there is in a particular stock.

Ask: The lowest price a seller will accept for a stock

On the opposite side, an “ask” refers to the lowest price a seller is willing to sell a stock for. The ask represents the supply side for a market for any given stock, while the bids represent demand.

Bid-ask spread: The difference between the ask and bid

Typically, the ask — also known as the “offer price” — will be higher than the bid. The difference between the bid and the ask is known as the “bid-ask spread,” or simply the “spread.” The smaller the spread, the easier it is to buy or sell a stock. That’s because, with smaller spread, less movement is needed to bring buyers and sellers to an agreeable price and conduct a transaction. Generally speaking, stocks and other assets that are being traded in higher volumes tend to have smaller spreads. Continue Reading…

The “mostly stocks” Retirement Portfolio

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By Dale Roberts, cutthecrapinvesting

Special to the Financial Independence Hub

It was a long time in the making, but I recently finished and posted the stock portfolio for retirees, on Seeking Alpha. It uses an all-weather portfolio approach but only puts stocks to work. Stocks are arranged by sector to perform in certain economic environments. Stocks and REITs will have to step up to do the work of bonds, gold, cash and commodities. We’re building the retirement stock portfolio on the Sunday Reads.

Here’s the post – Stocks for the retirement portfolio. That is a U.S. version. I will also post the Canadian stock portfolio (ideas for consideration)  on Cut The Crap Investing.

Defense wins ball games

The key is a core defensive stance: for market corrections, recessions and deflation. For those who are not able to access Seeking Alpha, here’s the portfolio.

As always, this is not advice. This is an idea and strategy for consideration.

Defensives @ 60%

Utilities – 10%

NextEra Energy, Duke Energy Corp, The Southern Co, Dominion Energy, Alliant Energy, Oneok, WEC Energy.

Pipelines – 10%

Enbridge, TC Energy, Enterprise Partners, Energy Transfer, Oneok.

Telecom – 10%

AT&T, Verizon, Comcast, T-Mobile, Bell Canada, Telus.

Telco REITs – American Tower, Crown Castle.

Consumer Staples – 10%

Colgate-Palmolive, Procter & Gamble, Walmart, Pepsi, Kraft Heinz, Tyson Foods, Kellogg, Kroger, Hormel Foods, Albertsons Companies.

Healthcare – 10%

Johnson & Johnson, Abbott Labs, Medtronic, Stryker, CVS Health, McKesson Corporation, United Health, Merck, Becton Dickinson, Cigna Corp.

Canadian banks – 10%

RBC, TD Bank, Scotiabank, Bank of Montreal.

Growth assets – 20%

Consumer discretionary, retailers, technology, healthcare, financials, industrials and energy stocks.

Apple, Microsoft, Qualcomm, Texas Instruments, Nike, BlackRock, Alphabet, Lowe’s, Amazon, TJX Companies, McDonald’s, Tesla, Visa, Mastercard, Raytheon, Waste Management, Berkshire Hathaway, Broadcom.

Inflation protection – 20%

REITs 10%

Agree Realty Corporation, Realty Income, Essential Properties, Regency Centres Corporation, Stag Industrial, Medical Properties Trust, Store Capital Corporation, Global Self Storage and EPR Properties.

Oil and gas / commodities stocks 10%

Canadian Natural Resources, Imperial Oil, ConocoPhillips, Exxon Mobil, Chevron, EOG Resources, Occidental Petroleum, Devon Energy.

Agricultural

Nutrien, The Mosaic Company.

Precious and other metals

Tech Resources, BHP Group, Rio Tinto

All said, I am still a fan of some cash and commodities and bonds. This was offered in the post …

The hybrid approach might then include:

  • 5% cash
  • 5% bonds
  • 5% commodities
  • 85% retirement stocks

More Sunday Reads Continue Reading…