High-net worth investors deploy a myriad of investing strategies including alternative investments. Insights and perspectives on macro trends in these asset classes are often less frequently available than those of the major markets. As such, below is commentary on alternative investment patterns from Carl Ludwigson, Director of Manager Research at Bel Air Investment Advisors, an investment firm that focuses on overseeing and managing over $8 billion in assets for 350 high-net-worth families, individuals and foundations.
In his commentary, Carl shares his perspectives on alternative investment classes as a means of portfolio diversification, outlining patterns across several notable alternative asset categories.
Commentary On Alternative Investments
- “Alternative investments are critical in portfolio construction during the monetary policy tightening cycle, particularly when historically elevated stock market valuations are justified by historically low interest rates.”
- “As monetary policy tightens, both stocks and bonds may suffer as equity multiples contract while fixed income duration negatively impacts bond prices. This leaves alternatives as a key diversifier to the traditional 60/40 portfolio.”
- One example is floating rate senior secured private debt which offers a relative haven from market volatility as well as a premium yield that may compete with equities going forward. Many strategists on Wall Street expect the long-term return on US equities to range from mid to high single digits annualized with volatility of approximately 15% while private debt offers a similar return without the high volatility drama.”
- “The short term and floating rate nature of the underlying loans helps to insulate direct lending from tightening monetary policy. The drawback is tax inefficiency as direct lending is almost entirely ordinary income so asset location in tax advantaged accounts is important. For a more tax efficient return stream, real estate funds in select growth markets remain attractive.”
- “Finally, the current vintage of private equity and growth capital may offer an attractive entry point as valuations in high growth companies have repriced in public markets. We expect this normalization of multiples to filter through to private market valuations as well.
- “Over time, private markets generally provide a premium to public markets and the lack of liquidity may actually be an advantage in reinforcing long-term investing discipline.”