Alternative Investments

As the world edges toward a global recession in the wake of rising inflation and monetary policy tightening, stocks and bonds are likely to continue feeling the weight of turbulent market conditions. As of Wednesday 12th October 2022, the S&P 500 recorded its sixth-straight of losses for the second time this year, driving the index down to its lowest level since November 2020. Strong selling in Treasuries continues amid higher than expected CPI data, despite the Federal Reserve's attempts to contain inflation. With the current level of uncertainty and market volatility, where can investors look elsewhere beyond traditional investments?

Alternative investments are financial assets that fall beyond the realm of traditional equity and fixed-income investments. Prominent examples that are widespread among institutional investors include private equity, private debt, real estate, hedge funds, venture capital and commodities. The purpose of investing in these asset classes is to provide returns that are uncorrelated to the broader stock market performance that help to diversify investor portfolios. To illustrate the rapid growth of alternative investments, dry powder, or cash reserves held by companies, is now estimated to be $290 billion for venture capital firms and around $3.2 trillion for private equity companies, according to Pitchbook. With over $13 trillion invested in alternative assets as of 2021, Preqin forecasts that this figure could reach as much as $24 trillion by 2026, equivalent to a compound annual growth rate of 13%. However, these types of alternative investments are often geared toward sophisticated investors, restricting accessibility for others.

Beyond these types of alternative investments, others include collectibles such as fine wine and art, which have gathered increasing interest in recent years. The Liv-ex Fine Wine 100 index has exhibited year-to-date returns of 8.1%, while the AMR All-Art Index has risen 4.4% year-to-date. This compares to a 24.7% downturn in the S&P 500 in the same period. This asset class appeals more to high net worth individuals and family offices, given that liquidity tends to be less of a priority as compared to institutional investors. With fine wine, the investment drivers often include the producer, vintage and wine critic evaluation. For fine art, the perception of the artist, gallery placement and historical provenance are some factors affecting prices. Furthermore, supply and demand, coupled with the overall economic situation, will have a large impact on returns. Collectibles can range far and wide, also including vintage cars, watches, stamps, coins and even luxury consumer items.

In May 2021, Goldman Sachs crowned digital currencies as a separate alternative asset class following strong client demand, with growing interest in the the underlying blockchain infrastructure. The highly 'risk-on' and volatile nature of cryptocurrency exhibits similarities with speculative equity investments, such as technology stocks, and a correlation between the two is slowly emerging. The difficulty with investing in cryptocurrency is deciding on where to start, given the choice between 20,268 digital currencies that exist as of July 2022. Although a first-mover advantage offers a competitive advantage to Bitcoin, which has a market capitalisation of $366.6 billion, alternative cryptocurrencies such as Ethereum offer better technology and expanded capabilities. The benefits of investing in cryptocurrencies include the accessibility, security and low transaction costs entailed. With institutional backing and the accelerating trend of decentralised finance, cryptocurrencies may play an increasingly important part in investors' portfolios.

Inherent risks to alterative investments include a lack of liquidity, fewer regulatory requirements and the highly leveraged nature of some assets. This highlights the need for stringent deal criteria and a thorough due diligence approach, especially as so many of these asset classes entail a greater degree of complexity.

DISCLAIMER: The above references an opinion and is for information purposes only. It is not intended to be investment advice and I am by no means a trained nor professional investment advisor, I therefore accept no responsibility for any losses incurred by investors. Remember, the value of investments can fall as well as rise, and you could get back less than you invest. If you’re not sure about investing, seek independent advice. Tax rules can change and their effects on you will depend on your individual circumstances.