Displaying items by tag: financials

In Kiplinger’s, Peter J. Klein, CFA and the founder of ALINE Wealth, discusses some downsides of investing in alternatives. Alternative investments include private equity, private credit, real estate, collectibles, etc., and it’s seen a surge of interest especially following its outperformance in 2022 while stocks and bonds saw double-digit losses. Additionally, accessibility has also increased due to regulatory changes and technology.

Over the next 5 years, the global market for alternatives is expected to nearly double from $9.3 trillion to $18.3 trillion. While many are focused on the potential for outperformance and diversification benefits, Klein points out some downsides that investors should consider.

Alternatives come with substantially less liquidity than investments in stocks and bonds which are liquid and transparent. In contrast, alternatives often require money to be locked up for long periods of time with a hefty fee to access it early. Many alternatives also come with ‘gates’ which mean that money can’t be withdrawn once redemptions reach a certain threshold. 

Another consideration is that alternatives often require more complicated tax reporting. For many investors with smaller sums, this complication offsets any benefit in terms of additional returns. Further, there is no track record of alternatives outperforming over longer time frames especially when accounting for the additional fees. Short-term results may be skewed as the asset class outperforms due to the asset class becoming more accessible. 

Finsum: Alternative investments have been gaining in popularity especially after strong performance in 2022. However, there are some drawbacks that should be considered. 

Entering 2023, many were expecting a big year for gold due to high inflation, rising recession risk, and considerable amounts of geopolitical turmoil. Yet, this hasn’t come to fruition. Gold prices enjoyed a decent rally in the first-half of the year but has given back the majority of these gains in recent weeks.

The most likely culprit is that real interest rates continue to rise as inflation moderates, but the Federal Reserve continues to hike rates. When real rates are rising, gold becomes less attractive as an investment because it offers no return to inventors. However when real rates are negative and/or falling, gold becomes more attractive to own. Thus, the best combination for gold prices would be a weak economy coupled with high inflation. As long as the economy continues to defy skeptics, a breakout for gold prices is unlikely.

The metal hit an all-time high of $2,078 in March 2022 following Russia’s invasion of Ukraine when geopolitical tensions culminated. It re-tested these levels in March of this year following the crisis in regional banks when many thought the Fed would have to intervene and possibly cut rates to support the banking system. Since then, prices have declined by about 6%. 

Finsum: Gold prices have stagnated following strong performance in the first-half of the year. Currently, prices are likely going to move lower as long as Treasury yields keep chugging higher.

In a piece for AdvisorEdge, James Langton discusses how banks are tightening their lending standards which could present an opportunity for alternative investment managers. According to a report by Fitch Ratings, there is a surge in interest for private debt from borrowers. In North America, private credit funds’ assets under management increased from $242.7 billion in 2010 to over $1 billion at the start of the year. 

And, this trend should only accelerate in the coming years especially as regional banks are a key source of funding, and many are struggling with an inverted yield curve. The crisis in regional banks earlier this year underscored their perilous position. Thus, it’s not surprising to see a flurry of new private credit funds. In the second quarter, 34 new funds were launched, raising $71.2 billion, more than double what was raised in the first quarter. 

Private credit is more insulated from rising rates due to its reliance on floating rate-loans. Additionally, default rates have remained at historically low levels at 1.6% in Q2 and 2.2% in Q1, indicating that the overall economy remains resilient and rewarding investors in these funds. 

Finsum: Funding from banks is increasingly difficult to access given tighter credit standards and challenges for regional banks. This is creating an opportunity for alternative investment managers as private credit funds step into the void.

Until a couple of years ago, the standard playbook for any investor looking to secure their retirement was a mix of stocks and bonds. But, this traditional style is being challenged especially as stocks and bonds have fared poorly in today’s world of stubborn inflation and high rates. 

This challenging environment is leading to more interest and demand for alternative investing especially as the asset class provided diversification and healthy returns in 2022 when both stocks and bonds were down double-digits. For Kiplinger’s, Tory Reiss covers the pros and cons of alternative investing for prospective retirees. 

In terms of the drawbacks, Reiss mentions a lack of liquidity which means that prices can drop especially during periods of market volatility especially in less mature markets. Another is that these investments typically have higher fees and costs which can undermine long-term performance. Further, there is less transparency and regulation in the space which means that there is more risk. 

However, there certainly are some positives such as the increase in diversification especially in rising-rate environments which have proven to be headwinds for stocks and bonds. There is also a potential for greater returns while also providing a hedge against inflation. 

Overall, investors should be open to some allocation to alternatives but should understand the risks and conduct proper due diligence especially in newer asset classes with less of a track record and regulatory framework.

Finsum: Alternative investments performed well in 2022 while stocks and bonds both saw steep losses. This is resulting in a surge of interest in the asset class. Here are some pros and cons to consider. 

The financial advisor space is extremely competitive which means it’s quite important to differentiate and identify what makes you unique. This is even more the case given today’s macroeconomic reality of high rates, inflation, and uncertainties. Advisors and investors may have been spoiled by the last couple of decades of low rates, providing a generous tailwind for stocks and bonds.

For WealthProfessional, Steve Randall discusses why becoming comfortable with alternative investments could fuel growth for advisors in this new era. Given that the upside for stocks and bonds is limited in this era, there is likely to be more opportunities in areas like responsible investing and alternatives, where the landscape is less defined.

In addition to these trends, Randall also identifies actively managed ETFs, virtual assets, and impact investing as other growth areas that could provide differentiation for advisors. 

Overall, he believes that asset managers will introduce new products in these areas in recognition of growing interest and demand. Over the last couple of years, alternative investments have generated positive returns and dampened portfolio volatility while stocks and bonds have delivered negative returns. 

This outperformance should continue especially if rates and inflation remain elevated, and advisors are recommended to get familiar with new offerings. 

Finsum: Alternative investments are gaining popularity for a variety of reasons. But, the most important is its outperformance in the last couple of years while stocks and bonds lagged.