Shut Up About Your Almond Farm

Tired of investors talking up their absurdly niche allocations, columnist Angelo Calvello explores the opposite: what these investors would never invest in.

Illustration by Sam Island

Illustration by Sam Island

I’ve grown weary hearing investors and consultants cackle about how niche investments like almond farms and small-market private credit deals in India could provide the returns they so desperately seek. For solace, I asked a diverse group of asset owners which niche investments they would not invest in and why. (None represented faith- or mission-based organizations or adhered to explicit environmental, social, and governance guidelines; to focus thinking, I disqualified any illegal investment and vetoed cryptocurrencies and marijuana.)

The hands-down loser: life settlements. While a few allocators said they rejected life settlements because it compounded their longevity risk, many more agreed with the allocator who bluntly asserted, “I won’t do a misery trade. Sometimes an opportunity is justifiably undercapitalized because nobody wants to be affiliated with it.”

Not far behind on the “do not invest” list were finance litigation and patent trolling. But oddly, there were few other specific examples given. I was expecting the list to include payday and auto title lenders, strip clubs, porn sites, dark web hacker funds, loot boxes, and companies that develop facial recognition software that scans the faces of men on dating apps to identify those who are married. (And yes, this last opportunity was proffered and attested by a respondent as a real thing.)

Interestingly, this challenge of identifying beyond-the-pale investments inspired allocators to share their views of niche investing and investing in general.

A few gave full-throated endorsements of niche investments. “There is a price and a situation that I would invest in anything at — just cash flows and probabilities.”

The former CIO of a large pension took a contrary position, adding the appropriate caveat: “Should you do any niche? The answer is NO (although I admit there might be exceptions, depending on your organizational setup). The reason is very simple: It does not matter.” (Emphasis in original.)


A peer contended, rather convincingly, that while an investment might not “move the needle,” it could offer other benefits: “Sometimes we invest in niche to learn something or put money into something we think we’re going to need an opinion about someday (think insurance-linked securities, machine learning, blockchain).”

Others rejected outright the idea of making any niche investments, regardless of the possible benefits: “I wouldn’t do any niche investing. In large part, I think niche investing is yet another malinvestment [sic] symptom of global lunacy . . . stop chasing yield! If one puts in the same work truly required for niche investments, one can find plenty of opportunities out there in the good old public markets that are quite profitable (higher than 5 percent plus inflation).”

Oddly, of all the responses, I find in this admittedly theatrical assertion the position closest to my own. To me, niche investments are fictional constructs of asset owners, asset managers, and consultants, conjured up to create hope.

In the taxonomic hierarchy of investments, there is no such category as niche. (Just like there is no such category as crisis alpha.)

There is no inherent attribute or trait that qualifies an investment as niche. Contrary to conventional thinking, niche strategies are not inherently capacity constrained. The capacity of most investments is an expression of historical circumstances, not a fixed attribute. Of course, some investments are inherently capacity constrained: Only so many boat marinas can be acquired and aggregated into a portfolio of cash-flowing assets, after all. But it’s important to recall that some investments that were initially capacity constrained (e.g., real estate in 1974, non-U.S. equities in 1976, and high yield in 1983) now support hundreds of billions of dollars of investments.

Certainly, alpha is not an essential feature of niche investments. This fairytale is based on the false premise that because niche markets are informationally less efficient, they are more likely to be sources of alpha — false because it fails to acknowledge that manager skill, not the structure of the opportunity, is the source of alpha.

Niche is simply an arbitrary description bestowed upon an investment by an individual or group that reflects the individual’s or group’s fundamental cognitive orientation.

The CIO of a “modest-sized endowment” succinctly captured this idea when he wrote that what “might be niche [investments] to some investors are commonplace to others. . . . Or, alternatively, the person describing them as niche simply hasn’t viewed the world in a broad enough context.”

I would add to this that niche also reflects the governance structure under which beneficial investors allocate capital. For example, if your investment policy statement allows only investments in public equities, public fixed income, private equities, and cash, then private debt would certainly qualify as niche. And over and above the IPS, if your board’s guiding mantra is “we do not want to read about any of our investments on the front page of The Wall Street Journal,” then you will avoid certain otherwise attractive opportunities (which probably takes a fund that purchases tax liens off the table).

Completely by chance, I found support for my position that niche markets are fictional constructs in Deutsche Bank’s 16th annual Alternative Investment Survey, which contained this gem of an insight: “Year on year, we have seen a growing percentage of respondents seeking niche alternative investment strategies. . . . When analyzing the survey . . . we found the demand for niche strategies to be led by investment consultants/advisers.”

It was ever thus.