High-Net-Worth Investors Turn to Alternatives. Should you?

Even in the face of the continuing bull market that we have enjoyed since 2008, high-net-worth investors are seeking alternative investments to protect and hedge their portfolios and other investments, according to a recent survey from Millennium Trust Company, an institutional custodian headquartered in Oak Brook, IL.

Investors with at least $200,000 in annual income have pared back their investments in traditional vehicles, such as stocks, bonds, and mutual funds, and are instead seeking opportunities in private equity, hedge funds, and real estate, according to the survey released on December 10.

This survey, which questioned over 500 high-net-worth investors about their current and future holdings and investments strategies, showed that nearly 47% of those asked invested in individual stocks of publicly traded companies this year, a decline of 10% compared to last year.

When it came to individual foreign stocks, the decline in ownership was even more pronounced—new investments dropped nearly 16% compared to last year. Investments and ownership in individual bonds also declined more than 8% over the same period in 2017, the survey showed. Instead of these common investments traditionally held by retail and institutional investors, more of those surveyed were willing to invest in alternatives.

“In spite of this historic bull market, we are seeing more investors interested in diversifying portfolios through alternative investments,” said Gary Anetsberger, CEO of Millennium Trust Company. “Technology is fueling a wider range of opportunities for investors and giving more individuals access to sought-after asset classes like private equity, real estate and hedge funds. There is also a growing interest in private debt, infrastructure and natural resources investments.”

The results of the survey showed that nearly one-third of respondents invested in real estate over the past year, with almost 73% investing in single-family rentals. About twenty percent reported that private equity has become a core holding and is more attractive. And over fourteen percent of those surveyed have invested in hedge funds over the same period of time.

So, what’s the driving force behind the increase in alternative investments? With the recent return of market volatility, should more investors consider adding alternative investments to their portfolios?

In March, the highly publicized University of Michigan Consumer Sentiment Index reached its highest levels since 2004 with a reading of 101.4 and has been on somewhat of a downtrend since. However, the slight slump in consumer sentiment has not put a stop to consumer spending this holiday season, which the research and data company eMarketer is predicting will cross $1 trillion for the first time. So, what does this mean? Consumers are confident about the current economic condition as well as the outlook for the foreseeable future.

But the same can’t be said for corporate CFOs who see dark storm clouds out on the horizon. According to a Duke University survey of corporate CFOs, chief financial officers see a 48.6% chance of a recession by the end of 2019.

“The end is near for the near-decade-long burst of global economic growth,” John Graham, a finance professor at Duke’s Fuqua School of Business and director of the survey, said in a statement. “The U.S. outlook has declined, and moreover the outlook is even worse in many other parts of the world, which will lead to softer demand for U.S. goods” and this will have a direct impact on consumers, investors, savers, and the stock market.

Alternative investments provide a broader degree of diversification since real estate, hedge fund investments, and private equity, for example, have a lower correlation to the movements and price fluctuations of traditional investment vehicles. With this in mind, alternatives can also help lower the overall volatility of a portfolio in addition to enhancing returns and limiting downside risk.

With the return of volatility that investors have seen in the market this year, it may be a great time to review your investment portfolio to see how you can work to mitigate risks. Remember what billionaire investor and hedge fund manager Seth Klarman said about risk, “Investors should always keep in mind that the most important metric is not the returns achieved but the returns weighed against the risks incurred. Ultimately, nothing should be more important to investors than the ability to sleep soundly at night.”

For more information about risk, alternatives, or just to chat, send me an email at info@sacks-associates.