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Alternative Investments 2022 2023
Alternative Investments 2022 2023
ALTERNATIVE
ASSETS
Against this landscape, investors struggle to ind safe havens for their capital and
continually seek alpha to defeat in lation. The bull market of the past decade ampli ies
the complexity of today's bear market by serving as a stark contrast. Many independent
investors are adrift with plunging net worth as stocks luctuate and the rising interest
rates drive real estate values down. Financial advisors are hard-pressed to deliver
superior returns to their clients while reassuring those who've never experienced volatility
as we see today.
Because of this volatility and doubt, alternative assets are becoming increasingly
attractive to investors seeking non-correlated returns or portfolio diversi ication.
Institutional investors, high net worth individuals, and family o ices have been allocating
Even the relatively few scares since 2008 proved minor speed bumps: December 2018's
US stock market lash crash quickly rebounded as monetary tightening fears proved
immaterial. Abroad, 2011's European debt crisis, spurred by sovereign bank collapses,
abated after austerity measures and policy reform. No matter the circumstance or event,
economic tailwinds held irm, propelling the global economy on an unstoppable growth
trajectory.
Today, those winds seem to have shifted as we face a hawkish Fed, increasingly tight
iscal policy, slowing economic growth, and in lation expanding. These factors, amongst
other concerns, create a collective pessimistic outlook re lected in the broad equities
market.
RECESSION WORRIES
This perfect storm of economic factors leaves many average Americans and investors
fearful of an imminent recession. Although di erent schools of thought quibble over
whether we are currently in a recession, the country is undoubtedly struggling.
Semantics aside, the question remains: will we fall into an undeniable slowdown, and how
long will it last?
Already some sectors are falling into what some deem a "rolling recession," wherein
industries contributing to GDP ebb and low rather than crash concurrently, leading to
slow or stagnant net GDP growth. Many Americans already feel the impacts of a national
recession, and the discomfort increases based on how close to the a ected industries
they work.
The fear of "pain to households and businesses," as FED Chairman Powell cryptically
referred to a potential recession, is leading to families preemptively cutting costs and
attempting to plan for an uncertain future – complicated, in no small part, by in lation
eating away at emergency funds and dreams of a smooth transition into retirement falling
as quickly as IRAs and 401(k)s. Currently, equities have sold o more than 20% YTD and,
despite trading at a relative discount, don't seem to have bottomed out as each new
market low falls further with limited respite.
• Cash. As Ray Dalio emphasized for years, cash is trash – but for di erent reasons
today than when he coined the mantra. Against an 8% in lation rate, cash loses its
buying power daily. By lagging nominal growth in every regard, holding cash today
means less of it tomorrow. Even cash alternatives like short-term treasuries have an
e ective zero real return.
• Stocks. Stocks are struggling—tech and growth-focused stocks were the mega
winners over the past few years. Previously fueled by cheap debt that’s no longer
easily accessible, investors now demand higher returns commensurate with the
new level of risk. Many companies struggle to rise to the challenge, and their stock
price re lects this. Although the shifting paradigm does mean a return to focus on
fundamentals, and thus long-term sustainability and value, companies unable to
quickly pivot risk insolvency and the highest-earning stocks of the past few years
face the most risk. The core holdings making up more than 20% of the S&P 500 are
down a collective 30% YTD as of the writing of this white paper in October 2022.
First, let’s take a look at the global market portfolio of $179 Trillion of asset classes outside
cash:
We notice that while global equities make up 43% of the global market portfolio, their
contribution to risk is at its highest at 75%. Government bonds make up 24% of the GMP
and carry a 3% risk contribution. Alternatives, while only at 4% of the GMP carry a 4% risk
contribution - almost the same as government bonds.
One report of family o ices shows exactly how sophisticated high-net-worth individuals
(HNWIs) and proactive funds are approaching the problem and further enhancing their
portfolios vs. the global market portfolio. Many institutional investors such as college
endowments notice this asymmetry between allocation and market risk and thus increase
their allocations to PE/VC alts.
Here, the family o ices are very accepting of the fact that alternative assets have low
liquidity, but because the traditional assets are impacted by turbulent macroeconomic
conditions, venture alts emerge as the most viable option as families work to rebalance
their portfolios.
The core grouping of alternative assets is a tried-and-true set of dynamic, diverse options
for discerning investors who wish to avoid correlated market risk and are willing to
accept long-term investment horizons and low liquidity nature of the asset class.
• Di erentiated access. While publicly traded stocks can be easily bought and sold
every day with low to zero commissions, many proprietary alternative investments
are not easily accessible. Top performing irms and funds are typically
oversubscribed as they raise their next funds. Co-investing with groups that have
unique access requires preexisting relationships.
1. Active management
2. Accessible to an elite class of investors, often accredited investors,
with a high minimum investment requirement.
3. Most importantly – low correlation to public markets.
When considering the spectrum alternatives as part of a diversi ied portfolio, investors
often look to the following categories.
VC/PE is increasingly attractive to a broad investor set and not restricted to tech
millionaires or insiders anymore. According to research conducted by UBS, in 2021, 80%
of family o ices report investment in private equity and venture capital:
HEDGE FUNDS
Created to hedge against market risk through inancial engineering and unique
strategies, "hedge fund" now refers to a broad class of privately managed wealth
management houses. Hedge funds use methods like short selling and complex derivative
packaging but also invest in stocks, bonds, and alternative investments.
• Direct lending
• Buying up distressed debt from falling companies
• Mezzanine nancing that consists of complicated debt-to-equity conversions.
At its most basic, all involve an investor or group of investors lending money to
companies (often in inancial straits) with an expectation of standard principal repayment
and periodic interest payments.
Venture capital and private equity are not subject to the Fed's whims like stocks and
bonds, bubble risks like real estate, or questionable practices like many hedge funds.
Instead, VC/PE relies on a deep bench of knowledge and expertise to guide strategic
investments in quality companies.
By leveraging VC/PE, investors open new vistas to generate returns in the face of a
shaky economy in exchange for postponing liquidity.
VC and PE expose investor capital to the "best of the best" in startup companies and
similar ventures, as those able to withstand the current crucible are likely to remain viable
over time – especially those nimble enough to adapt and change with the economic
tides.
The technological age also increases the attractiveness of VC/PE investing. With rapid
innovation the norm, often from small startups, early exposure to these companies
through VC/PE increases the likelihood of massive bene its through tails. While due
diligence is increasingly important when considering VC/PE investing, alternative assets
are increasingly making up a signi icant portions of a family o ice portfolios in today's
troubled times.
FURTHER INSIGHTS
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ALTERNATIVE INVESTMENTS AND HEDGE FUNDS INVOLVE A HIGH DEGREE OF RISK AND CAN BE ILLIQUID DUE TO RESTRICTIONS ON
TRANSFER AND LACK OF A SECONDARY TRADING MARKET. THEY CAN BE HIGHLY LEVERAGED, SPECULATIVE AND VOLATILE, AND AN
INVESTOR COULD LOSE ALL OR A SUBSTANTIAL AMOUNT OF AN INVESTMENT. ALTERNATIVE INVESTMENTS MAY LACK
TRANSPARENCY AS TO SHARE PRICE, VALUATION AND PORTFOLIO HOLDINGS. COMPLEX TAX STRUCTURES OFTEN RESULT IN
DELAYED TAX REPORTING. COMPARED TO MUTUAL FUNDS, PRIVATE FUNDS ARE SUBJECT TO LESS REGULATION AND OFTEN CHARGE
HIGHER FEES. ALTERNATIVE INVESTMENT MANAGERS TYPICALLY EXERCISE BROAD INVESTMENT DISCRETION AND MAY APPLY
SIMILAR STRATEGIES ACROSS MULTIPLE INVESTMENT VEHICLES, RESULTING IN LESS DIVERSIFICATION. TRADING MAY OCCUR
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DIVERSIFICATION DOES NOT ENSURE AGAINST LOSS.
THERE ARE SIGNIFICANT DIFFERENCES BETWEEN PUBLIC AND PRIVATE EQUITIES, WHICH INCLUDE BUT ARE NOT LIMITED TO, THE
FACT THAT PUBLIC SECURITIES HAVE A LOWER BARRIER TO ENTRY THAN PRIVATE EQUITY. THERE IS ALSO GREATER ACCESS TO
INFORMATION ABOUT PUBLIC COMPANIES. PRIVATE EQUITIES TYPICALLY HAVE A LONGER TIME HORIZON THAN PUBLIC EQUITIES
BEFORE PROFITS, IF ANY, ARE REALIZED. PUBLIC EQUITIES PROVIDE GREATER LIQUIDITY, WHEREAS PRIVATE EQUITIES ARE
CONSIDERED HIGHLY ILLIQUID. PRIVATE CREDIT INVOLVES AN INVESTMENT IN NON-PUBLICLY TRADED SECURITIES WHICH ARE
SUBJECT TO ILLIQUIDITY RISK. PORTFOLIOS THAT INVEST IN PRIVATE CREDIT MAY BE LEVERAGED AND MAY ENGAGE IN SPECULATIVE
INVESTMENT PRACTICES THAT INCREASE THE RISK OF INVESTMENT LOSS. INVESTMENTS IN PRIVATE CREDIT MAY ALSO BE SUBJECT
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LOCATION OF PROPERTIES, THE FINANCIAL CONDITION OF TENANTS, POTENTIAL LIABILITY UNDER ENVIRONMENTAL AND OTHER
LAWS, AS WELL AS NATURAL DISASTERS AND OTHER FACTORS BEYOND A MANAGER’S CONTROL. LIQUID ALTERNATIVES ARE
GENERALLY INVESTMENT VEHICLES THAT OFFER TYPICAL HEDGE FUND STRATEGIES IN A MUTUAL FUND FORMAT WITH DAILY
LIQUIDITY. MANAGED FUTURES CONTAIN HEIGHTENED RISK, INCLUDING WIDE PRICE FLUCTUATIONS AND MAY NOT BE SUITABLE FOR
ALL INVESTORS. SHORT SELLING AND SHORT POSITION DERIVATIVE ACTIVITIES ARE CONSIDERED SPECULATIVE AND INVOLVE
SIGNIFICANT FINANCIAL RISK. SHORT POSITIONS PROFIT FROM A DECLINE IN PRICE BUT CAN GENERATE A LOSS IF THE PRICE
INCREASES. SHORTING MAY ALSO RESULT IN HIGHER TRANSACTION COSTS WHICH REDUCE RETURN.
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