Asset Trip with Nelson Chu: From Traditional Finance to the Wide Open World of Alts

What is it about traditional finance that you didn't necessarily love and alternative investment that you do really enjoy?

I think I would probably separate out traditional finance as an industry and my ability to just be a good employee. To be honest, I'm probably just a terrible employee. I didn't really listen to my manager very well, and I always had my own ideas for how to solve a problem. That ultimately led me down the startup founder path.

I do think alternatives, in general, are just more exciting though. They're a greenfield opportunity, and not to say traditional finance isn't exciting, but I do think that when there's so much that needs to be done in the alts space, if you can be a pioneer in that sector, it’s going to be very powerful.

For traditionally-oriented investors, how do you see adding alts—and specifically private credit investments—to their portfolio benefiting them?

A lot has been said about the fact that the 80/20 model is dead, and I don't disagree with that. But I think it's now become something crazy, like 50/20/10/10/5/5. There are so many different opportunities to diversify, and it's really just what the investor is comfortable with at the end of the day. So we've seen no shortage of investors who latched onto art, collectibles, real estate, and more, because it's something that they understand, and that's exactly how it should be. The opportunity to find these investments has never been easier. 

When it comes to things like private credit, there traditionally hasn’t been an easy way to understand the product that you're essentially financing. It's a complex structure more akin to traditional finance in the institutional sense, with structures that are oftentimes found in transactions rated by ratings agencies. I do think that from an investor standpoint, everyone should be looking to alts if only for the fact that there are a lot of benefits that you wouldn't see in traditional investments, such as equities. Whether it's their uncorrelated nature or that they tend to decouple from traditional markets, or it's the ability to have something more tangible, a lot of these benefits can be net positive for investors. I think private credit can be a great source and avenue for it, but it doesn't have to be the only alt investment by any means.

Definitely. So you mentioned that you think everyone should be looking at alts. I'm curious about private credit investments specifically, do you think that's an asset that can be beneficial to every type of investor or more for particular types of investors?

If you look at institutional investors who traditionally invested in public credit, they've all taken a step back and begun to invest in private credit because they’re able to capture yields that are simply not available in the public debt markets anymore. If you use institutional investors as a benchmark and a proxy for investors as a whole, then yes, private credit can be a great alternative asset class. If the 80/20 model is truly dead, where are you going to get fixed income returns from? Private credit could be a great choice instead. As long as investors understand the risks that go along with investing in a private instrument versus the public instrument and liquidity constraints that are inherent in private investments then I think it's fair game to continue to have private fixed income and debt products in their portfolio for diversification.

I'm curious about your own personal investments. What's your investing strategy and how do you diversify and allocate your assets accordingly?

So obviously I'm 100% invested in private credit-just kidding. I think equity can always be a viable and important part of a portfolio. It’s naturally liquid, so there are certainly a lot of benefits to that. I think for the average investor, a decent portion of their portfolio could be in equities. I think from a risk tolerance standpoint, given that I'm on the younger side, there's a lot more optionality for what you can invest in. Crypto, for example, is something that at this point I think everyone can at least dabble in and learn more about. It's been interesting to see how much crypto has become part of millennials and Gen Z's net worth accidentally, just based on the run-up that they've had. If you want to rebalance that into more hard assets and more real-world assets, that's up to the discretion of the investor, but regardless, I think some cryptocurrency exposure can be good.

After that, it really comes down to what the investor wants. For me personally, I've been interested obviously in private credit, but also making angel investments in other startups and in art, especially during the pandemic. I've been involved in art for a couple of years now, and it's just been something that I think has been very personally enjoyable, which is going back to that kind of tangible asset idea that I was referring to earlier. Some people just appreciate the realness of it all, it’s something they can see and touch, and it’s what makes them attracted to it. In my case, I like the fact that it makes me happy and it has a calming effect on me when I see it around the house. For my portfolio, it's a mix of equities, angel investments, crypto, private credit, and art.

Are there any alternative assets that you've been eyeing or are curious about, but haven't invested in yet?

Going deep into some of those asset classes I mentioned earlier would be interesting. Crypto is unfortunately a 24/7 job, and I just don't have the time for that. But there's definitely a lot of activity in that space, and I think a few of these projects will manage to survive the test of time. On the private credit side, there are other asset classes that I really haven't touched thus far. I generally don't look at real estate as it’s just never been my personal interest. Obviously, real estate is a part of the private credit market, and it's one where given the demand for real-world assets and hard assets, I do think it will likely continue to be a good investment for the foreseeable future. It's just one that I haven't paid any attention to thus far.

What was your first foray into alternatives? Like the first thing that made you think about investing outside of stocks and bonds?

It was definitely crypto, in 2017. And clearly the moment I went into the alts space, I just went all-in as I started to look at other alternative investments like private credit. So crypto was one that got me into it, and then it started to open up my world to everything else that was in the alts universe.

Do you happen to remember how old you were when you started investing? Not just in alts, but in general, and what your very first investment was?

I was play-investing back when I was between the ages of 8 and 10 with my father. He was the one who had been investing in equities for a very long time. I remember those days when you had to actually call a phone number to hear how your stocks were doing and what they were priced at because the CNBC ticker didn't cover everything you wanted to see and there was no easy way to find it online. And crazily enough you had to make trades through a broker by calling them. It was just a different world back then, 20 some odd years ago. He was the one who always encouraged me to get into investing. 

In terms of making my first real investments, it was in college. I was in college from 2006 to 2009, which was a fascinating time to be investing because there was a huge run-up and then a huge crash. I got a literal crash course in what it takes to be an investor, and it's not fun. I played it safe in the beginning, investing in blue chips like Procter & Gamble. I still have that stake as it has some sentimental value at this point. As I got more knowledgeable, or so I thought, I followed everyone into the huge run-up in commodities. I went all-in on that, and I managed to lose almost all my money in a few months. It was a good lesson either way.

Speaking of investing crash courses and lessons, can you name your biggest investing win and your biggest investing loss?

My best investments have thus far come from the various angel investments I’ve made. On a pure returns basis, the best one would be a company called BlockFi where I wrote the first angel check for the company.

The biggest loss I ever had was probably also an angel investment. Startup investing is a bit binary; it either makes it or it doesn't. When I first started to make angel investments, that cohort almost all went to zero. But as I started to see more transactions and deals, and as I started to get better pattern recognition around founders, what it took to be successful, and as the consulting company got better at picking clients, the investments got better as well. As a result, the ones that I've made recently have all done quite well and it's just the ones from the first vintage have effectively all gone to zero. Good lessons learned along the way.

When you reflect on your lessons, and your wins and losses in the alternative space, are there any lessons that you can leave our readers with when it comes to investing in alternatives?

I think the biggest lesson is that alternatives are here to stay. They're not going anywhere, and there's never been more optionality for investors, so you should do your own research. There is no shortage of information out there at this point around all of this, especially as every platform pushes out their own content. You can really do a deep dive into what it is and invest in things that you're comfortable with, that you feel like you understand. 

The ability to generate outsized returns relative to the public markets, and/or the ability to generate uncorrelated returns that are stable relative to public markets, is possible in alternatives if you diversify the right way. If institutions have found the opportunity to diversify into alternatives, then there's no reason why an average investor can't. It could serve investors well to follow their lead in that respect, but be sure to do your own research and truly understand it as it’s quite different from what they may be used to investing in. Done well, the alpha could be there because it is such a greenfield opportunity right now in the alts space.

Take your own Asset Trip

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Disclaimer

The information in this article does not constitute an offer to sell securities or a solicitation of an offer to buy securities. Further, none of the information contained in this article is a recommendation to invest in any securities. All investments involve risk and may result in loss, including loss of principal. Percent does not render investment, financial, legal or accounting advice.