phone 270.226.1000 toll free 888.753.6972 www.kingdomtrustco.com

Opening The Door Part 1

Time is now for individual investorsto follow the lead of institutions

Why AlternativeAssets Are Key

By Justin Perun & Scott Foster

FOPENING

THE DOOROver the next several weeks,

Kingdom Trust will be publishing a series of white

papers focusing on alternative assets and the value that they

offer the investor, as well as the advisor.

ollowing the 2008 financial crisis, the global financial markets have experienced an increase in volatility, growing uncertainty surrounding the Euro and other international currencies, coupled with a significant rise in government intervention via the Dodd-Frank Financial Reform

Act which informed investors of their vulnerability in the market and established a new investor class. The mandate of these sophisticated investors’ is clear; they are looking for increased transparency, liquidity and risk management resulting in a rise in alternative investment asset flows.

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PART ONE Why Alternative Assets Are Key

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1 “Asset Allocation Can Reduce Systematic Risk.” The most pervasive risk facing investors – systematic risk – can be reduced through asset allocation. Authored - Adrianna Reyneri on February 5, 2013.2 Deutsche Bank Survey-Deutsche Bank Alternative Investment Survey identifies investor expectations for 2013.

Along with these individual investors, financial brokers and advisors have ex-pressed a strong opinion that there is a need for a different approach to money man-agement; focusing on a new paradigm of portfolio construction, risk management, transparency and liquidity. Financial advisors are re-evaluating the effectiveness of the traditional 60/40 allocation model. The argument that equities outperform other assets classes in the long term often fails to mention the risk undertaken to achieve such per-formance. Thus, recent investor mandates are requiring financial advisors to re-frame portfolio construction by addressing nimbleness in the markets, true portfolio diversifi-cation, liquidity and the ability to capture non-correlated enhanced return (alpha) while addressing investor cash flows needs/demands in an inefficient equity market. As a result, the focus has now turned to the use of alternative investments as a source of portfolio diversification.

By incorporating alternatives investments into a traditional 60/40 allocation model, it enhances the overall return (alpha) while dampening an investors’ exposure to system-atic or market risk. Systematic or market risk can be defined as risk inherent in the financial markets. “Systematic or market risk involves factors that affect the economy at large, and includes rising inflation, interest rate changes, currency fluctuations, natural disasters and social or political turmoil”1 In recent years, investors of alternatives have favored investments in real estate and commodities such as precious metals.

Alternative investments enable investors to allocate and diversify their expo-sure beyond traditional stock, bond and cash equivalents. The most predominant alternative investments are classified as hedge funds, private equity, managed futures or real estate investments.

Hedge funds are actively managed investment products seeking to achieve an absolute return. This investment product is regulated by the country it is domiciled in, in the US only accredited investor or qualified purchaser can participate via a limited partnership interest or managed account. Hedge fund strategies include but are not limited to: long/short equity, global macro and event driven.

A recent industry survey conducted by Deutsche Bank quantifies the maturation of the alternative investment industry with a focus on hedge fund investments. Respondents to the survey include institutions (pension, endowment, foundations), fund of hedge funds, private banks, consultants and family offices. Noteworthy highlights of the survey in-clude but are not limited to: 2

60/40 Model

Financial advisors are re-evaluating the effectiveness of the traditional 60/40 allocation

model. The argument that equities outperform other assets

classes in the long term often fails to mention the risk undertaken

to achieve such performance. Thus, recent investor mandates are requiring financial advisors

to re-frame portfolio construction by addressing nimbleness in the

markets, true portfolio diversifica-tion, liquidity and the ability to

capture non-correlated enhanced return (alpha) while address-

ing investor cash flows needs/demands in an inefficient equity

market. As a result, the focus has now turned to the use of alterna-

tive investments as a source of portfolio diversification.

By incorporating alternatives investments into a traditional

60/40 allocation model, it enhances the overall return

(alpha) while dampening an investors’ exposure to systematic

or market risk

phone 270.226.1000 toll free 888.753.6972 www.kingdomtrustco.com

PART ONE Why Alternative Assets Are Key

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AlternativeAssets

True diversity to a more informed investor also includes alternative

assets that are unrelated to the stock market.

Here is a partial sampling of alternative assets:

Real estate

Promissory note

Private business

Precious metals

Tax liens

Mortgages

Rental properties

Farm land

Cattle

Timberland

Commercial property

Race horses

• Investorsexpectcontinuedgrowth,predictingindustryassetsundermanagement (AUM)willreachanalltimehighof$2.5trillionbyyearend,forecastingnet inflowsof$123billionin2013.

• Hedgefundsarenolongerastand-aloneassetclass.Institutionalinvestorshave movedfromatraditionalassetclassallocationtoarisk-basedapproach.

• Investorsnowexpectsteady,predictablereturnstreams.Twothirdsofinvestors feelthathedgefundshaveperformedasexpectedorbetterin2012.For2013,65% ofinvestorsand79%ofinstitutionalinvestorsaretargetingreturnsof5-10%from hedgefunds.

• InstitutionalinvestorsdominatehedgefundAUM.Whilst57%ofprivatebanks decreasedhedgefundAUM,almost70%ofpensionfundsincreasedtheir allocations.Almosthalfofpensionfundsexpecttoincreaseallocationsby $100millionormorein2013.

Private equity is an investment into a company that is not publicly traded on any mar-ket exchange. The intent of the investment is typically to provide operating capital to a selected company to support growth, new product development or organizational restructuring. These investments can be accessed through a private equity or venture capital firm or directly by what is commonly referred to as an angel investor.

Managed futures are an actively managed investment product seeking to achieve an absolute return in the futures market. This investment product is regulated in the US by either the Commodity Futures Trading Commission (CFTC) and/or the National Futures Association (NFA). An individual investor can access a managed futures account either through a commodity pool operator (CPO) or commodity trading advisor (CTA). Managed futures strategies include but are limited to: futures on equities, futures on options and futures on commodities (ex: beans, cattle, precious metals). These strategies tend to be un-correlated to the equity market, thus implying a reduction of volatility and risk within an individual’s overall investment portfolio.

Real estate is an investment into a property in either the land and/or the commercial/residential buildings on it. The intent of the investment can vary from purely a long-term investment perspective by leveraging the inherent value of the property to shorter-term monthly cash flow generating investment. Real estate can be accessed directly or through various types of fund structures and historically has been the most un-correlated asset to the stock market.

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PART ONE Why Alternative Assets Are Key

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3 Wall Street Journal, March 12, 2013 – “Carlyle Group Lowers Velvet Rope”4 Wall Street Journal, March 12, 2013 – “Carlyle Group Lowers Velvet Rope”5 Wall Street Journal, March 12, 2013 – “Carlyle Group Lowers Velvet Rope”4 “Who Wants Alternative Investment Products?” Which investors have the biggest appetite for alternative investments? Where would they go for information? Millionaire Corner research provides insight. Authored - Adrianna Reyneri, January 17, 2013.

Over the last ten (10) years, overall asset allocation to alternative investments has significantly evolved. Starting at the rise of alternative investments in 2003, high net worth (accredited investor), ultra high net worth (qualified purchaser) and family offices comprised 75 percent of the investable assets in alternative investments. Institutional investors (ie: pension, endowment, foundation) at that time represented 25 percent of the investable assets and since then have grown to over 60 percent as of 2011. It is only over the last year that high net worth and retail investors have closed the gap, now representing an estimated 45 percent of investable assets in alternatives. According to the Center for Retirement Research at Boston College, the rise in retail investors in al-ternatives is partially contributed to the rise in defined-contribution plans. “The number of US workers with only so-called defined-benefit retirement plans has fallen by about a third over the last two decades while those paying only into defined-contribution plans, such as 401(k) savings accounts, has risen more than five fold (5X), to about 68 percent of workers in 2010.” 3

Over the last year, investment management firms have responded by broadening their product offerings to accommodate increased demand by lowering investment mini-mums, increasing transparency/liquidity and compressing fee structures. The latest firm to publicly announce its broadening of product offerings is Washington, DC-based Car-lyle Group. It is stated that the firm “hopes to reach a broader swath of wealth—which the firm estimated at more than $10 trillion,” according to people familiar with Carlyle's thinking.4

The minimum for entry into Carlyle's funds previously was between $5 million and $20 million, according to a securities filing for the new fund. The new fund, with a minimum investment of $50,000, will be available to "accredited" investors, essentially those with $1 million in wealth not including their homes. Private equity firms typically require in-vestors to commit money for 10 years to give the funds time to buy and sell companies. However, Carlyle’s new fund will let investors withdraw some of their money quarterly after two years, according to the filing.5

That being said, institutional investors still represent the most influential investor to alternative investments while family offices and high net worth and ultra-high net worth investors continue to increase their exposure to the asset class. Many of these investors confide in their financial advisor as the best source of information on alternatives. “High net worth and high income rank their primary advisor as their preferred source of infor-mation on alternative investment products, followed by online resources, the financial news and another financial professional. Self-described aggressive investors are most likely to consult an online resource, followed by their primary advisor, the financial news and other financial professionals.” 6

‘Alts’Rising

Starting at the rise of alternative investments in 2003,

high net worth (accredited investor), ultra high net worth

(qualified purchaser) and family offices comprised 75 percent of

the investable assets in alternative investments. Institutional

investors (ie: pension, endow-ment, foundation) at that time represented 25 percent of the

investable assets and since then have grown to over 60 percent

as of 2011. It is only over the last year that high net worth and

retail investors have closed the gap, now representing an

estimated 45 percent of investable assets in

alternatives.

phone 270.226.1000 toll free 888.753.6972 www.kingdomtrustco.com

PART ONE Why Alternative Assets Are Key

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ABOUT THE WRITERSJustin Perun is the President

of Bull & Bear Capital, LLC, a

boutique alternative investment

consulting firm based in Chicago,

Ill. Scott Foster, who has over 25

years of experience on Wall Street,

is the institutional business

development director for

The Kingdom Trust Company.

7 “Financial Advisors up allocations to absolute return strategies, says Brinker Barometer” Authored - Emily Perryman, February 27, 2013.8 “Financial Advisors up allocations to absolute return strategies, says Brinker Barometer” Authored - Emily Perryman, February 27, 2013.

Kingdom Trust is registered and regulated as a non-depository trust

company in the state of South Dakota headquartered in Sioux Falls, SD. If you are interested in learning more,

please visit our website at www.kingdomtrustco.com or by contacting Scott Foster (Institutional Custody) at

(270) 226-1017.

Financial advisors over the past couple of years have spent a significant amount of time educating themselves on alternative investments either through professional networking, online resources and/or industry publications and conferences. A recent industry survey conducted by Brinker Capital is reported that 48 percent of respondents (financial advisors) reported to have current exposure to absolute return strategies and 46 percent of these advisors will increase their allocation to the asset class in 2013. Fi-nancial advisors not only recognize the positive portfolio impact alternative investments have on a traditional stock and bond portfolio, but “65 percent of financial advisors view AR (absolute returns) as a complement to relative return strategies, versus 23 percent who position it as part of a core/satellite strategy, and 12 percent who use it as a fixed income substitute.”7

In addition to the inherent portfolio benefits, financial advisors are also leveraging alter-native investments, specifically the structure of the investment to assist in retaining cur-rent clients and to attract new client mandates. When asked by Brinker Capital in their most recent survey, fifty-seven percent (57%) of advisors responded they would access alternative investments through separately managed accounts, while thirty-five percent (35%) would utilize actively managed ’40 Act mutual funds and only two percent (2%) would access hedge fund directly on behalf of their clients’.8

In summary, the alternative asset industry is no longer a standalone asset class. Over the past couple of years alternatives have progressed to a mainstream investment product that can be accessed by institutional/retail investors as well as industry professionals such as financial advisors in various structures. These investors remain committed to the asset class as a way to diversify their overall investment portfolios beyond traditional stocks, bonds and cash products in a challenging investment environment.

Kingdom Trust is redefining the financial services industry standard in providing institu-tional custody solutions of assets for investment advisors, family offices and investment sponsors that seek flexible, innovative and cost effective custody solutions. Our inten-tion is to provide the industry best practices and best execution when it comes to the custody and administration of alternative investments.