While we expect the bulls to run in the equity markets during the short-term, we still see a potential bear market and/or recession on the horizon – i.e. 2-3 years from now.
So now is the time to prepare your portfolio by mixing in opportunities from alternative asset classes that don’t correlate directly with the stock and bond markets. That way, whether the bears return or not, your portfolio can be protected from a devastating loss.
Any time you want to add an alternative investment to your portfolio, we recommend that you consult with a wealth manager that specializes in those kinds of investments. We also recommend that you first gauge your risk tolerance, so you and your advisor can build an investment strategy that both fits your needs and resides in your risk comfort zone.
We have a free tool on our website that can quickly analyze your risk tolerance and provide your personal Risk Number—think of it as your sleep number, but for risk.
With that said, below are our current thoughts on a few select alternative asset classes:
Last year was better for hedge funds than 2015 in terms of returns, however they still performed below our expectations. There was marked disparity between hedge funds depending upon their strategies, types of investments, and their sector focus.
For example, managers specializing in healthcare performed quite poorly, while those specializing in financials performed extremely well. Also, those specializing in small-cap value did particularly well following the election in November.
Conversely, diversification was not a helpful strategy to employ in 2016. That said, we are encouraged that the election will accelerate the transition from government manipulated markets (via quantitative easing) to free markets. Thus, experienced managers finally found themselves in an environment where they could utilize their exceptional analytical talents and superior strategies to deliver outstanding results.
Overall, we are of the opinion that hedge funds should do even better this year since many of the more seasoned and experienced hedge fund managers are skilled analysts who can ferret out exceptional opportunities and reduce market risks by employing long/short strategies to simultaneously reduce market risk.
From a high of approximately $112.18 per barrel in June 2014, the price of oil declined over 75% to a low of $27.36 in January 2016. However, the price of oil has since recovered to more than $54 per barrel by the end of December 2016.
Together with the recovery in demand for other commodities as the U.S. and other global economies recover, we expect there to be opportunities to invest profitably in natural resources this year as demand continues to grow in concert with the recovering economies.
We believe that private equity is one of the asset classes that will continue to benefit from historically low interest rates. Many companies that are finding it difficult to grow organically are using mergers and acquisitions as an effective means to accelerate their growth.
Low interest rates facilitate that process since these transactions are frequently financed. Although we expect interest rates to rise somewhat as the U.S and other global economies continue their muted recoveries, we believe they will not rise to a point where they stifle the process.
Real estate has been one of the most obvious beneficiaries of low interest rates. While rates have finally begun to rise, they are still at historic lows.
More importantly, it should be noted that real estate investments can perform well in higher interest rate environments providing they do not rise too far, too fast, which we do not expect, given the tepid recoveries taking place around the globe.
If you have questions about alternative investments, or wealth management in general, we’re happy to help—no strings attached. Just click here to submit your question and we’ll get back with you right away.