BY JOHN MAULDIN
Over the last two months, I wrote a series of letters making the case for a worldwide debt default in the next decade. This is what I call “The Great Reset,” and it will rearrange much of the world’s wealth. People will see their financial condition change quickly, either for worse or better.
Imagine I had come to you in early 1929 and told you about the Great Depression. If you believed me, you would have changed your life and your investments, preparing to protect your assets and take advantage of opportunities.
So I’m whispering now. Get prepared. We have time.
Last week, I gave some general investment advice for a broader audience. Today, I will get more specific and discuss strategies that are available only to high-net-worth “accredited investors.”
However, you should read this important information even if you aren’t wealthy. You might get there someday and it will help prepare you for it. “Someday” could be sooner than you think, too.
Behind the Door
So, what lies beyond the secret door? Even those who qualify don’t always know.
That’s because, in addition to forbidding banks and brokers from selling these investments publicly, the law sometimes says they can’t even talk about the investments publicly.
Wealthy people often miss out on possibly great investments because they never hear about them. They, or their brokers and advisers, aren’t in the “deal flow.”
Some incredible deals (I see them all the time) actually aren’t that large, so the large “wire house” firms ignore them. They have so many brokers with so many clients, they stick with bigger offerings.
Now, let’s break down those investments.
The most common opportunities are in unregistered securities. Those are shares of stock that don’t trade on exchanges and haven’t gone through the normal IPO process.
An initial public offering is usually preceded by one or more private offerings in which wealthy investors can buy a company’s shares. Sometimes you hear about them because the companies are large and well-known.
Uber, for instance, is a private company whose shareholders are all large investors and funds. They don’t have to file the kind of quarterly and annual reports required of publicly traded companies. Thousands of smaller start-ups have similar status.
It is not the case that all these companies are great investments. Many are not. But you can’t get to the attractive ones unless you are an accredited investor.
Many gain exposure to these securities by investing in a venture capital fund, which gives you professional management and additional diversification.
And diversification is important in these types of investments, as many fail and go bankrupt. Are Uber and Airbnb worth their last valuation round? I have no idea. We will find out one day.
Private equity is a similar category but typically involves more mature companies.
You sometimes hear about a public company “going private” and delisting from the stock exchange. This usually means a group of investors bought all the shares, intending to restructure the business once it is out of the spotlight. You can be one of them if you’re accredited, either directly or through a private equity fund.
You really have to know who you are working with on private equity funds. Many use leverage that makes them riskier than they should be. There are as many varieties of private equity funds as there are breeds of horses, to use an odd analogy. So, they are suited only for sophisticated investors who have deep pockets and even better advisors.
Hedge funds are another common accredited-only investment.
The term is a bit misleading because many hedge funds don’t hedge. I prefer to call them “Private Investment Funds.” They work a bit like mutual funds, in that investors pool their money together under a professional manager’s guidance.
Hedge funds (or whatever you call them) cover a bewildering range of asset classes and investment strategies. Someone out there has a fund doing anything you can imagine, in any part of the world you can imagine.
But finding a good one is a challenge, though. I have spent much of my career helping investors do this and I still run across great funds I never knew about.
(Full disclosure: somewhere north of 20% of my personal investments are in what is typically classified as hedge funds. I favor diversified trading funds and generally (though I’ve made exceptions) don’t invest in the classic Jones model “long/short” hedge funds today, because I think the alpha they once had has dried up for the time being.)
I have always liked “distressed” hedge funds that buy unwanted assets at ridiculously cheap (at least in hindsight) prices. A patient team of turnaround artists can unlock the real value. It is an art form and some of the most storied names on Wall Street are so-called grave dancers. But their clients are very happy.
I mentioned private credit above, but that was generally about smaller loans. Some large hedge funds are essentially banks and can do very large deals indeed. Typically, they use about two times leverage and your capital will have at least a three-year lockup period.
Never invest in a private credit deal that offers deep liquidity but lends long term. The initial returns may look enticing, but if there is ever a “run” on the fund, it can collapse overnight.
The terms of the investment capital and the loans should be roughly equal. You don’t want there to be a recession where everybody starts trying to withdraw their capital, forcing your fund to sell loans at ridiculously low prices to those distressed debt funds.
While I can’t mention the fund’s name, a very large fund marked down its portfolio well over 20% during the last credit crisis, but not one client lost money. They were all locked up.
By the time the crisis ran its course, the loans had regained their value and everybody got paid and made the returns they expected to begin with. Capital and credit were properly aligned.
This is why you need sophisticated advisors to navigate this world. It is not for rookies. While hedge funds can be rewarding, many are complete disasters. As they say on TV, don’t try this at home, boys and girls.
That being said, look for funds where management has an edge that is not correlated to the market. There are more than you might imagine. This is what I mean when I say diversify trading strategies, not asset classes.