$400 billion opportunity by Tokenization

Tokenization has gained substantial popularity in the financial services market, particularly in asset management. You can read my previous article about "Unlocking the Cipher: Tokenization of RWA" - click

Today, Let's have a look at how tokenization can fuel a $400 billion opportunity in distributing alternative investments to individuals.

• Tokenization, or the use of blockchain technology to transform an asset or its ownership rights to digital form, is gaining popularity.
• Investors say they want to allocate 7% to 9% of their total portfolio to tokenized assets by 2027.
• Tokenized alternative assets, particularly real estate and private equity, are attracting institutional and high-net-worth investors.

How can we enhance liquidity in the alternative investment market?

The alternative asset management sector is expanding beyond institutional investors to include wealthy people, whose portfolios are frequently overlooked due to the manual and personalized nature of these investments.

The alternative asset management industry is undergoing a substantial shift, expanding its appeal and reach beyond traditional institutional investors. This increase is especially important because it begins to include high-net-worth individuals, whose investment portfolios have traditionally been underrepresented in this sector.

The conventional barriers to access for these investors originate from alternative investments' highly manual and tailored character, which frequently necessitates specialized knowledge and a hands-on approach to management. Alternative assets, such as real estate, hedge funds, private equity, and commodities, provide unique benefits that are increasingly appealing to wealthy individuals.

These advantages include the possibility of higher returns, diversification from traditional stock and bond markets, and inflation hedging capabilities. However, due to the complexity and unique qualities of these assets, investment management has become more personalized and personal, which can be resource-intensive and hence less accessible to individual investors.

Several major innovations are facilitating the shift to include wealthy individuals in alternative asset management. Technological improvements are playing an important role as digital platforms and tools emerge to expedite the investment process, making them more accessible and less labor-intensive. These tools enable personalized portfolio management on a previously unreachable scale, making alternative investments more accessible.

Furthermore, the changing regulatory landscape and the introduction of new financial products are also contributing to this pattern. Innovative financial instruments and structures are being developed to meet the interests and preferences of high-net-worth individuals, allowing them to gain access to previously inaccessible markets and investment opportunities. Wealth managers and financial advisors face both possibilities and challenges as the market expands.

They must tailor their strategies and services to meet the sophisticated expectations of high-net-worth clients, who need not only tailored investment solutions but also transparency, efficiency, and a clear awareness of the risks involved. This necessitates a thorough understanding of alternative assets as well as the capacity to apply technology to improve service delivery and customer engagement.

Here are a few techniques for increasing liquidity in the alternative investment market:

• Secondary Markets and Platforms
• Tokenization
• Standardization of Contracts and Valuation Methods
• Use of Derivatives and Structured Products
• Regulatory Support and Frameworks
• Educational Initiatives
• Partnerships and Alliances
• Liquidity Pools and Funds

How can the supply and demand gap within the alternative investment market be effectively closed to ensure a balanced and efficient marketplace for both investors and issuers?

Alternative investments, which include private equity, private credit, real estate, and hedge funds, have the ability to increase profits by diversifying investment portfolios. Because of their complexity and the demand for a long investment horizon—often more than a decade—these assets are primarily aimed at experienced institutional investors with no immediate liquidity needs.

The alternative investment environment lacks standardized infrastructure and regulatory frameworks, making asset management operationally difficult. Because of this complexity, alternative asset managers must focus on obtaining a small number of large-scale investments, often greater than $5 million. This criterion effectively excludes a large number of individual investors from engaging in the alternative investment industry, limiting their access to potentially lucrative investment possibilities.

Efforts to democratize access to alternative investments must solve operational challenges and high entry barriers, resulting in a more inclusive and efficient market for a diverse range of investor classes.

What strategies could be employed to increase the allocation of alternative investments in the portfolios of high-net-worth individuals, considering the current underrepresentation of these assets despite their potential benefits for diversification and yield enhancement?

Individual investors command a substantial share of global wealth, yet their exposure to alternative investments remains markedly low, with only approximately 5% of their assets allocated to this segment.

The global wealth distribution is nearly balanced between institutional entities, such as pension funds and sovereign wealth funds, and individual investors.

The latter group holds an estimated $150 trillion out of the global wealth pool, which totals approximately $290 trillion.

For the purpose of this analysis, "qualified investors" are identified based on the criterion of possessing more than $1 million in investable assets.

• High-Net-Worth Individuals: Possess $1 million to $5 million in investable assets.
• Very-High-Net-Worth Individuals: Hold $5 million to $30 million in investable assets.
• Ultra-High-Net-Worth Individuals: Have more than $30 million in investable assets.

Despite these groups' significant financial capabilities, there is a notable underrepresentation in their portfolios concerning alternative investments, with an allocation of only approximately 5%.

This discrepancy highlights a missed opportunity for diversification and potential yield enhancement within the investment strategies of high-net-worth individuals. Given the benefits of alternative investments, including lower correlation with traditional markets and the potential for higher returns, the low allocation suggests a gap in portfolio optimization that could be addressed with increased education on and access to alternative investment opportunities.

Despite the clear interest from both demand and supply sides, providing alternative investing options to individuals in an understandable and technologically native manner has remained a substantial problem. In response, fund managers and digital platform operators have begun to investigate fund tokenization as a way to increase access for regular investors. These pioneers are looking at the possibilities of tokenization to simplify and streamline the operational processes involved in providing alternative investments to individuals on a scalable basis.

Tokenization has the potential to change the operational infrastructure for alternative investments, providing numerous benefits throughout the ecosystem. Fund managers, distributors, fund administrators, and investors could all benefit from a more streamlined investment process. This innovation has the potential to improve liquidity, expand borrowing capacities, and provide more customizable options.

While individual investors, who currently have relatively low allocations to alternative investments and typically invest smaller amounts, stand to benefit significantly from these advancements, traditional institutional investors, who currently account for 84% of global alternative investment allocations, may also see significant benefits. This trend is expected to democratize access to alternative investments, making them more accessible and appealing to a broader spectrum of investors.

N.F.A. ;)

I am a data detective! Every dataset has its secrets, and I love solving these data mysteries. I dig into the tiniest details, spot trends, anomalies, and connections that others might miss, ensuring you have the complete picture.

Linkedin | Medium | Astro[AI] Wayfinder