Alternative investments — including hedge funds, real estate, private equity, and private debt — offer qualified investors access to a wider universe of unique investment opportunities. Although typically only available to individuals with a portfolio larger than $1 million, alternative investments play an important role for investors wanting diversified portfolios.
“We had an economic challenge in 2022 that we haven’t had since the 1980s, which was an overheating economy directly related to a lot of heavy stimulus and a reopening of the economy, post-pandemic,” says Jason Maas, managing director at The Burish Group at UBS Financial Services Inc., based in Madison. “As a result, there’s been all this inflationary pressure for the past 12 months.”
The Federal Reserve, in an attempt to slow the economy and bring inflation down, aggressively raised interest rates — which, in turn, hurt traditional stock and bond investments. In fact, Maas says last year was one of the worst bond market years in a century.
On the other hand, some alternative investments either rose in 2022 or weren’t as sensitive as stocks and bonds were to interest rate hikes.
Indeed, by allowing for a multi-asset class portfolio, alternative investments can offer three potential investor benefits:
1. Diversification: By accessing strategies unavailable to most public investors, alternatives can reduce dependence on traditional market drivers and therefore potentially add differentiated sources of returns.
2. Market volatility: Given the typically imperfect correlation of alternative investment asset classes with traditional asset classes, investors can help mitigate portfolio volatility in uncertain market environments.
3. Higher risk-adjusted returns: By allocating toward less liquid strategies, investors have the potential to not only earn an illiquidity premium, but also help improve a portfolio’s efficiency by improving the amount of returns generated per unit of risk incurred.
“While 2022 exposed a raw nerve of investor consequences, alternatives blunted some of that pain,” Maas says.
If you don’t meet the threshold for alternative investments, don’t fret. “Investing in stocks and bonds is still an option for investors ,” Maas adds. “What happened in 2022 was very rare, and the Fed is not indicating massive rate hikes forever. So, I think patient investors in stocks and bonds could ultimately be rewarded.”
That said, if you are considering alternative investments — and you qualify — The Burish Group typically suggests allocating between 20% and 30% of your total investments in that direction. But Maas cautions that due diligence is required.
“This is sophisticated investing, and it’s hard to just say, ‘All hedge funds are the same,’ or ‘All private equity investments are the same,’” Maas notes. “Unfortunately, they’re not. When you get into the alternative investment arena, you need to seek out a qualified group that can provide attractive client outcomes.”
Jason Maas, CFP, CIMA
Managing Director – Wealth Management, Senior Portfolio Manager
(608) 831-4283
