1. Many investors are tired of hair-raising market volatility
The year 2020 was one of record-breaking volatility. In March 2020, the 11-year bull market abruptly came to an end, and the VIX volatility index hit a record high. Although the S&P 500 ended the year up 16%, volatility remained elevated throughout 2020.
The VIX spiked several more times, capping off with the presidential election in November. Alternative investments are generally uncorrelated with public markets, meaning that adding them to a portfolio can increase diversification and reduce overall portfolio volatility.
2. Equities remain expensive, and forecasted future returns look less appealing.
By many metrics, the U.S. stock market is currently expensive. All three major stock indices are at record highs, and the S&P 500’s P/E ratio, equal to the market value per share divided by earnings per share, is well above historical averages.
Another popular metric known as the “Buffett Indicator,” measured as the total market cap of U.S. stocks divided by GDP, is also at an all-time high. Many analysts also are increasingly pessimistic about future stock market returns. Charles Schwab forecasted that returns on U.S. large-cap stocks would fall to 7.1% from April 2020 through March 2030, compared to historical returns of 10.1%. Declines in U.S. small-cap stock returns are expected, as well.
3. Low-interest rates are depressing returns.
The low-interest-rate environment has taken the wind out of the sales of many traditional safe-haven assets. U.S. government bonds, the safe-haven investment of choice for individual investors, are returning a yield below inflation, and many high-quality sovereign bonds from OECD countries have negative yields. What this means is investors can no longer count on a traditional 60/40 portfolio to provide healthy returns and safeguard against capital loss.
Instead, many investors are using alternative investments, such as real estate, as safe-haven investments. This asset class has many of the advantages of traditional safe-haven investments — including a lack of correlation to equities, lower volatility, and strong performance through market cycles — while offering the potential for much better returns than highly rated sovereign bonds.
4. Investors are planning for higher inflation.
A fourth factor we see driving investor interest in alternatives is the specter of inflation. According to a survey by Bloomberg, analysts believe inflation may rise to as high as 2.9% through June 2021 and slowly taper down to around 2.2% in 2022.
Although some economists, like Fed Chairman Jerome Powell, believe inflation is a short-term phenomenon, other economists worry rising inflation may be a more dangerous, longer-term problem. Bonds, especially longer-duration bonds, fare poorly in a rising inflation environment. Instead, investors can turn to alternative investments that can act as a better store of value.
5. Technology is democratizing alternative investments.
The fifth factor driving the rise of alternative investments is technology. Institutional investors and ultra-high net worth individuals have realized for decades that alternative investments have the potential to offer returns that are equal to, if not better than, public equities.
However, for individual investors, most alternatives were difficult or impossible to access due to a combination of high investment thresholds, a lack of transparency around the market for many alternatives, and the high degree of specialized knowledge required to understand and value investment opportunities. Now, technology-enabled platforms are giving individual investors access to the kinds of alternative investments that were previously only available to a select few.
Institutional investors and ultra-high net worth individuals have realized for decades that alternative investments have the potential to offer returns that are better than public equities.
However, for individual investors, most alternatives were difficult or impossible to access due to a combination of high investment thresholds. Now, technology-enabled platforms like ours are giving individual investors access to the kinds of alternative investments that were previously only available to a select few.
The performance of alternative assets is not closely correlated with public stocks, bonds, or funds.
Alternative assets, when properly structured and managed, are great to preserve capital.
Alternative assets can generate stable and predictable cash flows.