DISCLOSURE: THIS POST MAY CONTAIN AFFILIATE LINKS,MEANING That I GET A COMMISSION IF YOU DECIDE TO MAKE A PURCHASE THROUGH MY LINKS, AT NO COST TO YOU. PLEASE READ FULL DISCLOSURE HERE
So, is Yieldstreet a really good private market alternative investment platform?
Can you really find better investments on YieldStreet?
Background Checks On Yieldstreet
Whenever I find a new and innovative investment platform that sells the dream, I like to at least do a simple online background check to see whether it faces any lawsuit from investors.
Based on what I’ve found online, it appears that “YieldStreet is facing litigation filed by investors who lost more than $100 million in a series of defaults of high-risk and misleadingly marketed alternative investment products.”
The lawsuit filing states that despite Yieldstreet’s claims of no principal loss, in-depth ‘diligence,’ and reliance on ‘asset class experts’, YieldStreet’s investment products are poorly sourced and structured, with a default rate five times higher than even that of so-called ‘junk bonds.’
As Yieldstreet mainly markets credit products to investors, the credit risk (i.e. default risk” is one of the biggest risks inherent in this type of investment product.
Let me put it more simple for you.
Credit products, in essence, are loans.
So, if you loan people money, the biggest risk is that they cannot pay you back.
That’s why banks do a lot of background checks and credit history checks and also ask for income proof before they lend you money.
The reason is that banks want to make sure that you will be able to pay them back.
In Yieldstreet’s case, it appears that they NEVER did their due diligence to check the borrower’s background and ability to pay back the loan before marketing the loan products to investors to buy.
For example, the vessel deconstruction products that Yieldstreet marketed to investors failed.
Ship deconstruction is a type of recycling that extracts raw materials for resale from non-operational vessels.
The vessel deconstruction product is marketed as a 24-month loan with a high-interest rate of over 10%, secured by the vessel acquired or retained by the borrower.
Later on, investors were told that many vessels went missing and the borrower defaulted.
In other words, investors lost all their money.
What is more shocking is that the SAME BORROWER was not just behind one such deal, but also behind quite a few other vessel deconstruction products marketed by Yieldstreet.
So, investors in ALL of these vessel deconstruction products lost their money.
Yieldstreet was marketing these alternative investments as low-risk asset-backed investments when in fact it was highly risky.
According to this article, as of the end of the first quarter of 2020, nearly one-third of Yieldstreet’s portfolio was in default.
That does not show Yieldstreet’s good at alternative investments at all.
One more thing, there could also be a potential conflict of interest.
Yieldstreet makes money by collecting fees on the alternative investment products that they sell.
So, they might be incentivized to promote as many investment products as they can to maximize their fees, regardless of whether investors lose money or not in these investments.
For me, this is a big red flag because personally, I don’t feel safe investing my hard-earned money in investments sold by people whose interests are not aligned with mine.
How YieldStreet Works
Yieldstreet makes it very easy and simple for individual investors to invest in alternative investments such as real estate, private equity, and private credit that are previously only available for accredited investors.
It categorizes each investment available by the following attributes:
- Eligibility criteria
- Risk tolerance
- Time horizon
- Investment style
So, here’s how it works.
First, you answer a few questions about your investment preferences.
Then, Yieldstreet’s engine analyzes all available investment opportunities on its platform and recommends a few alternative investments including real estate, private equity, venture capital, private credit, crypto, and art.
Lastly, you go through the recommendations and choose what you want to invest in.
It’s indeed very easy for anyone to just invest on the platform.
Yieldstreet claims that all investment products go through a stringent multi-step vetting process before it becomes a potential recommendation.
However, judging from the multiple defaults of the vessel deconstruction products sold by them and millions of dollars lost by investors, the vetting process does not seem to be as stringent as it claims so far.
Now, let’s look at some of the most recent alternative investment products being offered on the Yieldstreet platform:
Let’s look at these products in detail.
The first product is actually a few structured notes packaged together.
Don’t be fooled by the name “Income Notes”.
Structured notes are essentially “Put Option Selling“.
So, what is put option selling?
Basically, by selling put options on a stock, you are getting paid to provide “downside protection insurance” to the option buyer for a fee.
For this structured notes product, there are three underlying stocks Citigroup, Edward Lifesciences Corp, and ServiceNow.
So, you are kind of selling put options on these three stocks.
I am sure that you have heard all the benefits advertised.
Now, let’s look at the risks involved.
For example, Citigroup’s stock price is currently $48.
Let’s say the downside protection barrier is 35% of the specified strike price which is $56.
The risk is that if Citigroup’s stock price has fallen more than 35% to below $36.4 on the day of maturity, you lose more than 35% of your capital.
If Citigroup’s stock price has fallen more than 50% on the day of maturity, you lose 50% of your capital.
Theoretically, you can lose 100% of your capital if the underlying stock’s price falls to zero on the day of maturity.
By investing in this kind of product, your upside is very limited while the downside is huge if the share price crashes.
Personally, I don’t think this is a good risk-to-reward ratio.
On top of that, by buying structured notes instead of selling put options directly in the market by yourself, your upside is also greatly reduced by all the fees charged by various parties such as the issuing bank and Yieldstreet.
For example, Yieldstreet charges an annual 1.5% management fee.
For all these reasons, I personally will never buy structured notes, but I do sell PUT options directly from my trading accounts on fundamentally good stocks.
Now, let’s move on to the second product offering which is an “Art Equity Fund”.
The risks with art investing are just too many.
First of all, there is the liquidity issue.
The art market is rather illiquid.
What that means is that the “target term” of art investing might exceed the estimated term by a significant amount of time because they cannot find a buyer to sell the art to or cannot find a buyer to buy at a favorable price.
In other words, your money might get locked up for an indefinite period of time.
Also, the price of the artwork is not transparent like the stock market.
So, it’s very difficult for you to value art and find out how much your art investment is really worth at any point in time.
Secondly, the “Targeted return” of around annualized 13%-17% advertised on the Yieldstreet website is just too attractive and tempting to make me question whether or not it’s an exaggeration and false promise.
To put it in context, Legendary investors such as Warren Buffet and Charlie Munger find it very difficult to achieve an average annual return of 15%.
Yet, this Art Equity Fund is advertising for a potential annual return of 13% -17% for 5 years.
Wow, I wonder why legendary investors Warren Buffet and institutional investors are not rushing to invest in this fund instead of picking stocks by themselves.
By the way, there is a disclosure by Yieldstreet regarding the “targeted return”.
“There is no guarantee that targeted interest or returns will be realized or achieved or
that an investment will be successful. Actual performance may deviate from these expectations materially, including due to market or economic factors, portfolio management decisions, modeling error, or other reasons.”
What it is saying is that we are targeting an annual return of 13- 17%, but there is no guarantee.
In fact, this investment might NOT even be successful (i.e. profitable) and you could lose a significant amount of money due to market or economic factors, our investment decisions, or our modeling errors.
So, I highly recommend that before you invest, you make sure you understand ALL the risks involved first and not focus on the advertised “high returns”.
In fact, Warren Buffet once used the “Mona Lisa” to explain why art is a terrible investment many years ago.
Warren Buffet said that France would have made 1 quadrillion if it had invested instead of buying the “Mona Lisa”.
“Buffett noted that Francis I, the former king of France, bought Leonardo Da Vinci’s “Mona Lisa” in 1540 for 4,000 gold crowns, or the equivalent of $20,000. If the monarch had plowed that money into an investment generating a modest after-tax return of 6% a year, the country’s coffers would be overflowing with more than $1 quadrillion by 1963, or 3,000 times its national debt. Meanwhile, the “Mona Lisa” was insured at a value of $100 million in 1962.”
So, there you have it.
Personally, you will have a much better chance of growing your wealth through investing in good businesses than buying art.
Here’s a list of stock research platforms that I use to find good businesses to invest in:
YieldStreet Alternatives
As Federal Reserve continues to raise interest rates to bring inflation down, many banks and credit unions are giving very high-interest rates (up to 4% APY) on their savings account or money-market account.
These high-yield savings accounts and money-market accounts are FDIC-insured, which means your money is considerably safer while yielding as high a return as the Tellus account.
Now, there is an easy and simple way to shop for the highest-yield savings product in one place without having to open another new bank account.
Raisin is a financial technology company that allows people easy and quick access to competitive interest rates on products like savings accounts, money market accounts, and CDs from multiple banks and credit unions — without ever having to open or maintain multiple accounts or juggle multiple statements.
Is it safe to use Raisin?
The short answer is yes.
Because your money is always held by an FDIC-insured bank or NCUA-insured credit union, NOT by Raisin.
High-yield Savings Accounts From Banks
High-yield savings accounts are one of the safest investments that you can have if you are looking for a high-yield return.
Plus, interest is credited to your account every month.
Below is a list of banks that currently offer higher-than-national-average yields on savings accounts.
It’s very simple and fast to open a high-yield savings account. Most importantly, your money is federally insured up to $75,000.
So, there is almost close to zero risk as you can get when it comes to high-yield investments.
Bank High-Yield Savings Accounts | %AYP | |
Western Alliance Bank | 5.05% | Min $1 deposit, Daily Compounding, Interest credited monthly, Federally Insured, 24/7 online access |
Greenstate Credit Union | 5.01% | Min $1 deposit, Daily Compounding, Interest credited monthly, Federally Insured, 24/7 online access |
First Mid Bank & Trust | 4.90% | Min $1 deposit, Daily Compounding, Interest credited monthly, Federally Insured, 24/7 online access |
Mission Valley Bank | 4.86% | Min $1 deposit, Daily Compounding, Interest credited monthly, Federally Insured, 24/7 online access |
Medallion Bank | 4.82% | Min $1 deposit, Daily Compounding, Interest credited monthly, Federally Insured, 24/7 online access |
Adda Bank | 4.85% | Min $1 deposit, Daily Compounding, Interest credited monthly, Federally Insured, 24/7 online access |
State Exchange Bank | 4.70% | Min $1 deposit, Daily Compounding, Interest credited monthly, Federally Insured, 24/7 online access |
High-yield Money Market Accounts (From Banks & Credit Unions)
High-yield money market accounts are just as safe as savings accounts because it’s federally insured.
The key difference between money market accounts and savings accounts is that money market accounts might allow you to write checks and give you debit cards.
Most money market accounts only require a minimum of $1 deposit to open.
Money Market Accounts | %AYP | |
Atlantic Federal Credit Union | 4.75% | Min $1 deposit, Federally Insured, 24/7 online access |
Hanover Bank | 4.85% | Min $1 deposit, Interest credited monthly, Federally Insured, 24/7 online access |
America First Credit Union | 4.90% | Min $1 deposit, No Fees, Interest credited monthly, Federally Insured, 24/7 online access |
Patriot Bank | 4.8% | No fees, Daily Compounding, Federally Insured, 24/7 online access |
Great FVC Bank | 4.75% | Min $1 deposit, No Fees, Interest credited monthly, Federally Insured, 24/7 online access |
MPH Bank | 4.70% | Min $1 deposit, Daily Interest Compounding, Federally Insured, 24/7 online access |
Leave a Reply