Amid the scramble for alts, three lesser known investments

Article content

Alternative investments have long played key roles in the portfolios of Canadian family offices. But beyond real estate and private equity, some of these firms are going further afield into non-traditional assets that can really diversify an ultra-high-net-worth portfolio.

“The role of these investments is targeting very high returns,” says Athas Kouvaras, portfolio manager with Richter Family Office in Toronto, “while acknowledging these are typically riskier because they’re often less liquid, more volatile and have uncertain outcomes.”

Here is a look at three off-the-beaten-path alts on Canadian family offices’ radar today.

Improving yields in crypto farming

The continued growth, utility and ultimate success of cryptocurrencies are dependent on their liquidity, and a highly anticipated new version of the “yield farming” platform Tokemak V2 is designed to provide that liquidity while maximizing returns.

Consider the new Tokemak as a sort of robo-advisor for yield farming cryptocurrencies, says Gary Coleman, president of Garibaldi Investments Ltd., a Winnipeg family office. Yield farming is a fast-growing but high-risk and volatile area of cryptocurrency investing in which crypto assets are put to work to generate relatively consistent returns exceeding 15 per cent annually when done efficiently.

The new Tokemak platform generates higher yields as a result of greater efficiency, lower fees and less legwork, Coleman says.

The new version requires less “gas,” a term referring to the computational cost associated with crypto network transactions, thus it is more efficient, he adds. Tokemak V2 also reallocates your investment into new positions — or liquidity pools — offering the best risk-adjusted yields. Without Tokemak, achieving that steadier, higher yield would be difficult because investors must manually switch between pools.

This is time-consuming, complicated, inefficient and reduces the return on investment, Coleman says. “The latest version of Tokemak basically puts the whole process on autopilot to generate the best yield possible.”

Coleman adds, “This certainly is getting into the weeds of crypto,” noting the investment idea is likely foreign to “crypto neophytes.”

Fractional investing in big league sports

Owning a professional sports team isn’t just for billionaires anymore. Increasingly, private equity funds offer fractional ownership of some of North America’s highest profile teams to select accredited investors.

Not only might fractional owners enjoy possessing a share of their favourite NBA, NHL or MLB teams, it also makes for interesting cocktail party conversation, says Kouvaras, who declined to name the fund that Richter clients hold. “We would be lying if we didn’t say that some of our clients are attracted to this investment beyond the economics.”

Of course, the investment case is compelling, too.

Forbes provides annual valuations of more than 130 pro sports teams, which in aggregate saw their value increase about 74 per cent since 2018. Of those, the value of 27 teams more than doubled over that span. Many factors are driving growth, not the least of which is these businesses are essentially monopolies in their respective markets, Kouvaras points out. As well, their fan bases are growing and often extremely loyal. “People don’t just switch teams,” he adds.

Furthermore, investor demand is growing amid limited opportunity to invest, and that’s despite the NFL not allowing fractional ownership in teams. The expectation is that the league will eventually allow it, “but our thesis isn’t dependent on that,” Kouvaras adds. “There are more than enough teams to make this worthwhile.”

As with other exotic alternatives, clients are willing to forgo liquidity for “the aggressive return profile,” he adds.

What’s often key to successfully investing in assets like these is blending various exotics together, increasing the likelihood of generating de-correlated returns for a portfolio, he says.

“If the correlations are low enough, you end up with different tailwinds at different times,” Kouvaras says, “which can really power growth over time.”

Time is indeed money

Luxury wristwatches may be more time-tested investments than cryptocurrencies, but these wearable assets are still considered higher risk, given their high barrier to entry, relative illiquidity and volatility, says Victor Godinho, a wealth advisor with Kismet Wealth Group Corp. in Toronto.

“That said, we’re seeing more clients looking to invest in what is a more hobbyist and fun endeavour,” he says.

Luxury watches from Rolex, Cartier and Breguet can even be seen as indirect plays on cryptocurrency. When crypto was booming, demand for luxury watches soared, he says, and that led some buyers — flush with crypto profits — to pay substantially more for watches than their market value. Volatility ensued as prices then plummeted with the cryptocurrency crash in 2022, he says.

Yet similar to Bitcoin, which has surged to new heights recently, watches may be poised for another upswing as well. Godinho adds that, more broadly, wealthy investors gravitate to luxury assets like wristwatches because these investments offer equity-like, long-term growth.

The 2024 Knight Frank Luxury Report alludes to as much, highlighting that luxury watches as a sub-asset class grew 138 per cent over the last decade, trailing only fine wine and rare whiskeys. Demand also far outpaces supply.

“Watchmakers can’t just ramp up production because the skill set to make the watches is increasingly rare,” he adds. Even entry-level Rolexes like the Cosmograph Daytona and Submariner have long waiting lists.

“These are watches that might typically retail for $15,000 but are now selling for about $20,000 on the after-market,” Godinho says. His firm often serves as an intermediary for clients, connecting them with trusted experts who can help them build watch portfolios that usually require a $200,000 investment minimum.

Yet the sky’s the limit, with some investors willing to pay millions for just one watch. That includes the Patek Philippe Aquanaut Luce “Rainbow” Minute Repeater, adorned with 130 diamonds and 779 sapphires, retailing at nearly US$2.8 million.

Please visit here to see information about our standards of journalistic excellence.