Every dollar you spend, save, or invest has an impact — even if you don’t know what the impact is. Which means when we direct our wealth intentionally, we have the opportunity to make meaningful change.
That truth has driven the Ellevest Investments team to spend the last five years (and counting!) building a best-in-class impact investing platform for private wealth clients — one that doesn’t compromise on the potential for financial returns or the chance to effect change. (And one with specially curated investments you’d be hard-pressed to find at other wealth management firms.) For equities, the Ellevest Intentional Impact portfolios let you selectively invest in companies that align with your values. For fixed income, the Ellevest Municipal Impact Strategy, managed by AllianceBernstein®, lets you help close gaps in underserved and under-resourced communities.
But the investments where our clients can make the biggest direct impact?
But first: What are private alternatives?
Everyone seems to define it slightly differently, but in our book, an alternative investment (typically shortened to “alt”) is any asset that isn’t a publicly traded stock, a bond, or cash. It can be anything from a rare art collection to real estate, venture capital, and so on. Private alternatives, as you might expect, are alternatives that aren’t bought and sold on major exchanges (like some commodities, precious metals, and REITs are, for example).
How alternatives can benefit your portfolio
Diversification is one of the keys to long-term investing success. We don’t know which investments will perform best in the future. But we do know that historically, owning assets that behave differently from one another under different market scenarios has helped mitigate overall portfolio risk.
Investing in both stocks and bonds is a good example of diversification: Over the long term, they have performed differently from each other. But alternatives, and specifically private alternatives, can take portfolio diversification to a whole new level. Because they encompass such a wide range of different assets, you can choose alternatives with characteristics that offset the risks of stocks and bonds.
But it’s not just about risk; private alternatives also have the power to generate investment returns that are differentiated — and come from different sources — than those of stocks or bonds. Some alts have the potential to perform well when stocks don’t. Others have historically been recession-resilient, continuing to perform even when the economy is struggling. And still others have strategies that are intended to perform positively no matter what’s going on in the markets. (Of course, every investment has its own unique risks.)
Private alternatives can also generate income. For example, private debt may pay interest, and real estate may bring in rental income. And finally, in the case of impact alternatives, they can drive direct positive social and environmental impact. More on this below.
How Ellevest’s approach to alternatives is different
Here’s the thing: Not all alternatives are created equal. They don’t all help offset the risks of stocks and bonds. (In fact, some alternatives may amplify the risk of holding stocks!) Others may have the financial characteristics you want, but no positive impact.
At Ellevest, we actively seek alternatives at the intersection of diversification, returns, and impact — and use them to create a customized portfolio to help you achieve your financial goals, income needs, and desired impact. Here’s how.
Strategic differentiation
Plenty of investment firms and wealth managers let you invest in alternatives. The biggest ones usually offer a range of private hedge funds, private equity funds, and direct real estate funds. Smaller firms might also offer liquid alternatives (ie, alt-focused mutual funds or ETFs), and / or semi-liquid and non-traded alternatives (ie, those that simply offer opportunities to sell or redeem from time to time). These kinds of alternatives have had periods of outperformance in the past, but many of them — particularly liquid alternatives — have fallen short of expectations over the long term, correlating with stocks more than predicted. For example, between January 2011 and December 2021, hedge funds had a 0.78 correlation with the S&P 500 (with 1 being perfectly correlated, and 0 being not correlated at all).
At Ellevest, we seek and carefully vet alternatives to find those that aren’t dependent on how stocks or bonds perform, how the economy is faring, or whether interest rates or inflation are rising or falling. Instead, we look for alternative investments whose returns are driven by other factors, like persistent imbalances in supply and demand, no matter what’s going on in the economy.
Of course, there are some alternatives offered by other wealth managers that meet our investment criteria, but they may not have the kind of positive impact that our clients seek.
Impact: A double (or even triple) bottom line
Impact investing is the act of using capital to address some of the world’s largest societal and environmental issues — while seeking financial returns at the same time. And that’s key: Any investment, regardless of its potential for impact, must meet our fiduciary standards and investment criteria first and foremost. But factoring impact into your portfolio composition has the potential to create a double bottom line: financial and impact performance.
Those with the means and ability to invest in private alternatives have access to an incredibly powerful form of impact investing. For example, Ellevest clients have invested in:
Renewable energy
Eco-smart forestry
Affordable and workforce housing
Venture capital, including that with a focus on underrepresented founders, women’s health tech, innovation in construction to reduce housing poverty, and essential services for lower-income households in emerging economies
Private debt, including trade finance and growth-stage loans to profitable small- and medium-sized businesses in emerging economies, and micro-loans to low-income households in emerging economies seeking access to safe water and sanitation
We also proactively co-create investing options for impact where we see opportunities. For example, a private debt fund providing growth financing to private companies already had above-average representation among underrepresented owners. But we wanted to go further. So we collaborated to offer a special vehicle for Ellevest clients that offers the same investment strategy but focuses solely on women owners, LGBTQIA+ owners, and/or owners of color.
And it doesn’t even have to end there: In some cases, we’ve found alternative investments that aim to close more than one social or environmental gap, creating a potential triple bottom line.
Diligence above all else
A private alternative has to measure up against a lot of high bars to be added to the Ellevest Private Impact Alternatives platform.
First, we’re always on the lookout for unique investment strategies and new areas of impact we can offer to our clients. My investments team and I spend significant time sourcing and researching new opportunities. In fact, we actively seek diversified teams and underrepresented (and undiscovered) fund managers that other investors may overlook.
Next, we dive deep into the details and spend time meeting with a fund’s manager to understand its investment strategy, performance track record and competitive advantages, sources of risk and return, and how the manager manages and mitigates risk. Our operations and security teams also evaluate the firm’s trading and operational processes and procedures, review fund documents, and assess security and data privacy risks.
Once a fund has been through all levels of due diligence, it still has to be approved by Ellevest’s Investment and Due Diligence committees before it can be added to the platform.
And our work doesn’t stop there. We continue to monitor each fund’s financial performance against expectation, operational practices, and impact.
Throughout the diligence process, we also pay close attention to whether a fund company’s values align with Ellevest’s. (Fun fact: More than 80% of our money managers are women and/or people of color — in comparison to 2% for the industry overall.)
Let’s get started
We believe that the Ellevest Private Impact Alternatives platform is unique among wealth managers; we built it with double bottom lines as our North Star. And we’re proud and honored to help our clients do well and do good by investing in impact alternatives.
If you would like to explore how our alts platform can fit your financial and impact goals, we would love to talk.