Across the Alternatives Universe: An Interview with Hedonova Head of Investments Neel Aryan Birla

The alternative asset space as the Altan Insights community knows it is relatively nascent. Nonetheless, the growth is staggering - in platforms, in assets, and in investors. The investable universe is getting larger everyday. Naturally, as markets grow and demonstrate further future potential, solutions and vehicles arise to offer investors simpler and/or differentiated means of gaining exposure. Hedonova is one such fund, investing on investors' behalf across real estate, cryptocurrencies, NFTs, art, wine and spirits, listed and unlisted equities, and agronomy among other asset classes. As Hedonova is among the earlier companies to utilize a fund structure in investing across these asset classes, we thought hearing more about how they approach allocating in the space could be helpful to the Altan community. We caught up with Neel Aryan Birla, Head of Investments at Hedonova, to learn about their methodology, their portfolio construction, how they manage liquidity (a more pressing factor for funds than individuals), and more. As we see additional entrants exploring the space in new ways, expect to see more content sharing these varying perspectives.

Q: What gave Hedonova the confidence in the long-term opportunity to pursue a fund offering that allocates to asset classes like Crypto, NFTs, Art, Spirits, Real Estate, and Agronomy among others?

Neel: We're often asked whether our passion for alternative assets stems from an aversion to traditional assets. Absolutely not. In fact, more than a fifth of our portfolio is invested in listed equities and another fifth in unlisted equities (unicorn startups). We chose to invest in alternatives because of our team's past experience with it. As investors, we're agnostic to the asset class we invest in and are return-driven. Select asset classes like spirits, art and startups have beaten the S&P, while equipment leasing and agricultural assets have posted higher post-tax yields than residential real estate. We chose alternatives seeking returns and passion.

Q: For assets where there aren’t underlying cash flows and value is based largely or entirely on supply and demand (i.e. art, Spirits, some Crypto, etc.), how does Hedonova go about crafting an investment thesis and evaluating risk?

Neel: We hunt liquidity regimes in these assets. Money flow drives asset prices so that's what we track. Think of Bitcoin in 2017, Cryptokitties in 2019, and the art markets of 2021. We look at money flow into particular assets and try to take exposure early. Measuring risk is a challenge for the more unique asset classes like films and art since alternatives don't fit into standard risk models. So, we have to qualitatively study each sector. For example, auction data from Sotheby's and Christie's is an indicator of the art markets. On the other hand, our equity and real estate investments fit common frameworks.

Q: While it likely won’t always be the case, with alternative asset liquidity improving every day, liquidity is currently somewhat of a challenge in many asset classes. How does Hedonova manage to invest in those asset classes where liquidity is more limited?

Neel: Mitigating risks that arise from lack of liquidity is the hardest problem we face. The liquidity of assets is restricted only to the platforms which securitized them in the first place. I mean, there's no one exchange for art. If I buy into artwork from Masterworks, I can't sell outside their platform. To mitigate this, we make investments that are securitized. What I mean is that we own equity in Special Purpose Vehicles that own the assets. This makes assets easily transferable on the OTC markets.

Q: As a relatively early entrant to a space that doesn’t yet have recognized benchmarks, how does Hedonova think about portfolio construction? Is it a “bottom up” approach based on the best individual opportunities available across the landscape, or do you determine sector/asset class outlooks first and then size underlying  opportunities accordingly?

Neel: At the moment we're using the S&P 500 + 4% as a benchmark, meaning that we're targeting to beat whatever the S&P returns plus four percent. It hasn't been a challenge in 2020 or 2021 YTD.

We go with a top-down approach where we look at asset classes that are attracting liquidity and allocate to the best offerings in that segment. There was a lot of hullabaloo about European real estate prices stagnating post COVID but we entered the industrial space - data centers. People stay at home, people use more internet. 

Q: It seems there are new fractional alternative investment opportunities popping up every day, but there’s also growing demand for the strongest offerings. Is there a minimum dollar-size allocation to an offering that Hedonova seeks for involvement? Is there an effort to uncover opportunities on newer or overlooked platforms to obtain greater allocation?

Neel: Oh, absolutely. We recently allocated some funds to vacation rental properties. This was a first, since we normally invest in commercial or industrial assets. So we're open to all kinds of asset classes as long as it makes sense in the broader macroeconomic context.

There's no minimum ticker size. We've bought NFTs by emerging artists for a few thousand dollars as well.

To answer the last part of your question, we'll have to go back to liquidity in a two-fold manner. We want to explore historically overlooked asset classes. However, if it's overlooked, that means it's not attracting money flow. Money flow is the first checkbox on our investment criteria. Secondly, if the asset class is overlooked, it affects liquidity at the time of exit. 

Q: Many of your investments – media royalties, equipment financing, agriculture – are yield-generative. Is there an ideal allocation mix of yield-generation vs. price appreciation that you seek to achieve to better insulate the portfolio from volatility?

Neel:  There's no academic theory that we can refer to in order to design an ideal portfolio mix for these assets. We do spend a lot of time collecting data in order to build a framework sometime in the future. We look at allocation from the vantage of fund level volatility (yield generating assets like equipment leasing tend to have lower volatility), so we'll increase or reduce allocation depending on how the more volatile assets like cryptocurrencies are performing. That being said, when we find an investment we love, we go for it without much regard to portfolio mix. We increased allocation to Ethereum early in 2020 over Bitcoin. It skewed the portfolio a little too much towards cryptos but the 10x return since really paid off.

Q: Why should prospective investors consider an allocation to the asset classes Hedonova pursues, and more  specifically, why is a fund investment worth considering?

Neel: A good rule of thumb I use myself is to allocate double of my crypto portfolio into alternative assets but that's obviously very crude. I think a sophisticated investor should be allocating 15 to 22% of their portfolio to alternatives.

There are just too many alt assets available today. There are probably 150 platforms in the US, 70 in Europe, and 50 more in emerging markets. Take roughly 100 offerings each, and you have more offerings than there are stocks traded on the NYSE. There's not a lot of data available on them either. Any listed company has annual reports since forever and hordes of analyst coverage. For alternative assets, it's a good day if you get a one-pager with meaningful data. This makes it hard for a retail investor to make an informed decision. A fund, however, can do things a little differently. We can negotiate better prices, lower fees, and have the data resources, both at the offering level and the industry level. Think of it as investing in equities via a mutual fund. You let the professionals do the job.

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