April 2022
With the world in flux, it’s natural to feel anxious about the future of your investment portfolio – Omicron is surging like a tsunami, Russian troops are storming the Ukrainian border, inflation is soaring, stocks are tumbling, and central banks are tightening their grip.
Amidst all of this fear and uncertainty, what should investors do to protect themselves?
After enjoying a strong bull market since March 2020, markets have come back down to earth. From their recent peaks in late 2021 to early 2022, the S&P 500 was down as much as 9 percent in January, the NASDAQ 16 percent, the FTSE 2 percent, and the Euronext 100 around 5 percent. While stocks partially recovered towards the end of February, they could easily dip again.
Meanwhile, inflation has gone stratospheric, defying the moderate forecasts of experts. In the US, inflation was up at 7.5 percent in January 2022. In the UK in December 2021, inflation was 5.4 percent, and 5 percent in the Eurozone.
Inflation rate in the USA and Eurozone (2012-2022)
Source: Statista
Supply bottlenecks and increased demand may have kickstarted inflation, but now, the real danger is that increased inflation expectations may become a self-fulfilling loop. If this happens, producers, consumers, and workers will all suffer, and the economy and markets will bear the brunt.
This threat of runaway inflation has made central banks hawkish. The Federal Open Market Committee (FOMC) has raised interest rates in March with at least six more to come this year. Even the European Central Bank (ECB) is considering lifting its rates. ECB rates may even be positive in 2023!
Higher interest rates will temper recovery from Omicron once it has crested around the world, and they are already weighing heavily on the NASDAQ and growth stocks.
It’s important to remember that corrections and bouts of inflation are a normal part of the stock market life cycle. The S&P 500 alone experienced 11 corrections since the turn of the century.
But what is surprising is that many investors are doing themselves and their retirement funds a disservice by not preparing properly for these inevitable corrections.
We are not talking about active stock management, cycling between growth and defensive stocks. These moments are difficult to time. Rather, the focus is on building a well-diversified portfolio that provides returns in all seasons.
“Diversifying well is the most important thing you need to do in order to invest well.” – Ray Dalio
Traditionally, the main method for diversification has been allocating funds across different asset classes. For instance, investors would mix in some gold, corporate bonds, government bonds, and cash into their portfolios, rebalancing when needed as they approached retirement. Such a strategy has become easier with the proliferation of commodity and bond ETFs.
But this strategy is not as sound as it once was. Correlations aren’t a guarantee, and certainly not forever, as they change over time. Since 1997, and until recently, bonds and stocks have been moving in opposite directions. But over the last year, the correlation has moved into positive territory.
Gold, government bonds, and cash remain the ultimate safe havens for risk-averse investors, with the trade-off of lower returns.
Some see Bitcoin as “digital gold,” which can hedge against movements in the stock market while also delivering large returns. However, in recent months, Bitcoin, too, seems to be moving with stocks, and its price is extremely volatile. Yet, as with gold, Bitcoin still retains its inflation-fighting properties.
Surely there must be a better way?
Enter Ray Dalio, CEO of Bridgewater, the largest hedge fund in the world, with USD billion in assets under its management. After nearly losing it all in the 1980s, Dalio rose from the ashes with a new mantra that he calls the “Holy Grail of investing”: find 15 to 20 good quality uncorrelated income streams. By doing this, Dalio has shown that you can make reliable returns while significantly reducing risk. His hedge fund is proof of this winning strategy in action.
Of course, none of us has the resources of Bridgewater, but we do have the advantage of being more nimble than a hedge fund. To ensure that their funds make good returns, super investors like Dalio and Buffett must take large positions in any investment. They invest in major listed companies, bonds, and even ETFs. In contrast, small investors can invest in many other types of assets, and in smaller amounts. This is why, for smaller investors, wealthy individual investors make a better role model than hedge funds.
Wealthy individual investors may have more money than you, a better investment network, and access to the highest-quality personalized advice, but, like you, they can be agile and creative in what they can invest in. So, what are they investing in?
According to a survey by EY, 81 percent of the ultra-wealthy invest in alternative investments, compared to 14 percent of the “mass affluent.” In addition, the ultra-wealthy are diversifying with alternative investments – and not just stocks and bonds.
Current usage of alternative investments between different wealth groups
Source: 2021 EY Global Wealth Research Report
Alternative investments are well-suited for diversification because, by their very nature, they are typically less volatile and less correlated to the stock market.
Their reduced volatility is due to their typically long investment horizons, which require investors to commit for a set period. Valuations are also more fundamental rather than being influenced by momentum trading or animal spirits.
Alternative investments are less correlated to stock markets because of these long investment horizons and because they are often in niche sectors or built on unique innovations.
Alternative investments could offer not only greater risk protection, but also often outperform the market. An estimate by Preqin demonstrated that alternative investments outperformed the S&P 500 by 137.8 percent over the last 20 years. Smart investors are enjoying a win-win by drinking from the Holy Grail and experiencing lower risk and higher returns as a result.
So, what types of alternative investments are the ultra-wealthy investing in? When we lift the bonnet of their alternative investment portfolios, the following asset classes emerge:
• Private equity
• Private debt
• Private real estate
• Hedge funds
• Commodities
Pre-IPO and private equity are where the big money is made on fast-growing startups. In the past, these startups were listed much earlier, providing a rocketship return for small investors. Nowadays, startups are fed so many more rounds of VC funding that many have little immediate interest in an IPO. As a result, unicorns are routinely minted, while remaining private and out of reach of small investors.
Private debt involves loaning funds to private companies. Historically, private debt was seen as the last refuge of desperate companies. However, the past two decades have seen enormous growth in the private debt market. This form of investing provides companies with greater flexibility and more attractive conditions than the traditional banking sector. For the investor, large returns are available with better security than investing in a stock.
Real estate is king, but true loyalty lies at the top end of the market. Large commercial, retail, and luxury developments can be very lucrative. While "location, location, location" is important, profits are made in proportion to the vision and scale of the investment. In addition, real estate can be a helpful hedge against inflation because house prices and rental income tends to rise with inflation.
Hedge funds are specialized funds that combine various arbitrage strategies to achieve returns no matter whether the market is moving up, down, or sideways. Their reputation took a hit because of the 2008 crisis, but successful hedge funds like Bridgewater still attract big money from eager investors.
Commodities include metals, oil, and agricultural products. Some investors buy physical commodities, such as gold, while many others trade commodities using options or ETFs. Commodities are great for diversification and hedging against inflation.
Investing in alternative investments used to be difficult for small investors – you can’t just buy alternative investments on an exchange, nor can a small investor pick up the phone and get a seat on an exclusive pre-IPO.
In the alternative investment game, you need contacts and cash.
This is where Moonshot can help. Our diverse and multidisciplinary team has the combined experience and network to secure you an invite to the deal table. Through our structured product offerings, investors can gain access to the most lucrative investment deals.
“Don’t tell me the sky’s the limit when there are footprints on the moon.” – Harlan Coben
At Moonshot, we are thorough in our search and pride ourselves on providing both high-profile and niche alternative investment opportunities, many with a Swiss connection.
Over the last year, we have facilitated our members accessing exclusive pre-IPO investments in companies including Nubank, Coinbase, Palantir, Public.com, and SpaceX. We also offered lucrative private equity investments in Swiss luxury EV manufacturer Piëch Automotive and green energy innovator Syhnelion SA. Further, our private debt investments include Swiss luxury real estate innovator Amēa and tech-boutique hotel operator Le Bijou.
Moonshot has also recently introduced three new strategies to provide investors with the opportunity to invest in small portfolio baskets of our best equity, fixed income, and real estate offerings.
The expected returns on our equity investments range from 1.2x to 22,9x. For our private debt investments, the expected returns are between 3 to 14 percent per annum.
Moonshot provides you with access to these golden opportunities, starting from as little as CHF 10’000 so you can increase your risk protection today without sacrificing your returns.
Over the next month, we will be hosting several presentations on new investments we have sourced. As places are limited, make sure to book in advance to avoid missing out.
