Family offices are turning towards alternative investments. So are fraudsters.

What do LEGO sets, baseball cards, and cryptocurrencies have in common? In these volatile economic times these alternatives have, in many cases, managed to outperform the S&P 500 as an investment class. There are of course several caveats. A LEGO set with a 615% annual return, an admirable showing, could mean appreciating in value from $3.99 to $28.46. And while Baseball cards remain “the most liquid tangible asset markets”, neither option is going to make up the bulk of a sophisticated investor’s portfolio. But one fact remains true. Due to recent market instabilities, more investors are looking beyond traditional avenues and towards alternative investments, or assets that are not correlated to the stock market. And as the acceptance of these assets grows, so do the numbers of scammers and fraudsters in this field.

Alternative investments provide something the market doesn’t

Alternative investments are known as non-correlated assets because their rise or fall in value is untethered to the direction of the overall stock market. While they are an important component of any healthy diversified portfolio, their popularity not surprisingly grows when the market is on a downward trend. Ashley O’Connor from Invesco describes them as

  • Investments that engage in “shorting” (i.e., seeking to profit from a decline in the value of an asset), such as global macro, market neutral and long/short equity strategies.
  • Investments in asset classes other than stocks and bonds, such as commodities, natural resources (i.e. forestry, mining leases), infrastructure, and real estate.
  • Investments in illiquid and/or privately traded assets, such as private equity, venture capital and private credit.

Non-correlated assets are seeing robust rates of adoption and family offices and high net worth investors are driving that trend. With the markets trending downward, alternative investments can provide a source of hope for many investors overwhelmed by gloom. While mining leases and real estate tend to be typical securities of choice, many investors with greater appetites for risk are throwing their lot in with less traditional assets, such as cryptocurrencies and legal cannabis enterprises. While some of these alternative investments are outperforming their more traditional counterparts, they are not with their pitfalls.

The risk of fraud is high

Bitcoin is the cryptocurrency with the highest profile, but it is no longer the only game in town. There are currently hundreds of other such digital currencies on the market each with their own unique features. However, the cryptocurrency market is also replete with scams. From fraudulent “Initial Coin Offerings” (the crypto version of the IPO) to currencies that simply don’t exist, several cryptocurrency investors have found themselves cheated out of their hard-earned fiat cash.

Cannabis is also another industry with a less than transparent reputation. Despite being a relatively new industry in the United States some companies involved with legal cannabis have already been sued for fraud. A number of other businesses have identified the “green rush” and sought to cloak themselves in the positive aura of legal cannabis in order to make a profit, even in many cases when their business hardly has any involvement with cannabis.

So it comes as no shock that the uncertainty and novelty involved with non-traditional avenues of investment attracts the same class of fraudsters who plague other industries.

New industries, same tactics

Even in new “disruptive” businesses the ways fraudsters operate almost never stray from a well-worn path. In our many years fighting against financial fraud, whether it’s in real estate, or family offices, or fake Facebook shares, we’ve learned that scammers and schemers all work from the same playbook. By reeling investors in with promises of guaranteed returns, keeping them hooked with charm and additional opportunities, and finally keeping them silent with shame and fear, fraudsters have been able to separate even the most sophisticated investors from their money. And the nature of many alternative investments provides the perfect playing field for them to ply their trade.

Alternative investments are becoming more attractive than ever and diversifying is an unavoidable part of any investment strategy. Because of our years of experience taking on fraudsters, we’ve learned how to identify them and the precise approach required to win back close to 100% of our clients’ money, regardless of the nature of the grift. Investors shouldn’t feel afraid to take on their new opportunities, but they should be prepared to recruit an experienced financial fraud recovery team when things go wrong.

To talk about reducing the risks of alternative investments, get in touch with Mike Paris