Alternatives
According to Bloomberg senior ETF analyst Eric Balchunas, there is only a 25% chance that the SEC approves a spot ethereum ETF. He points to the lack of SEC engagement on the topic and the absence of any positive signs or chatter on the subject, which is a departure from the lead-up to bitcoin’s approval. Balchunas believes this lack of engagement is ‘tactical’ rather than ‘procrastination’.
The crux of the issue is how ethereum should be classified. There are indications that the SEC is leaning towards treating it like a security based on subpoenas to crypto companies that have interacted with the Ethereum Foundation.
However, there are some dissenting voices who are more optimistic about approval. Craig Salm, Grayscale’s Chief Legal Officer, says the SEC’s reticence is due to most issues already being cleared up during the bitcoin ETF approval process. He believes both ETFs are nearly identical, except for the underlying asset. He also pointed to the approval of an ethereum futures ETF and its classification as a commodity future as a favorable sign.
Currently, several asset managers have filed for approval for an ethereum ETF, including Blackrock, VanEck, ARK 21Shares, Fidelity, Invesco Galaxy, Grayscale, Franklin Templeton, and Hashdex. The most immediate deadline is May 23 for VanEck.
Finsum: Over the next couple of months, the SEC will decide on an ethereum ETF. Reading the tea leaves, Bloomberg’s Eric Balchunas is not optimistic that it will be approved.
Robert Mitchnick, Blackrock’s digital asset lead, believes that bitcoin is more like ‘digital gold’ rather than a ‘risk-on’ asset, despite its strong correlation to equities in recent years. Throughout bitcoin’s existence, there has been a constant debate about its true nature. Some argue that bitcoin is like gold given that there is a fixed supply, which means that it should provide protection against inflation.
While this may be true in theory, in reality, bitcoin has largely moved in the same direction as equities, which undermines the argument that it offers diversification. In 2022, bitcoin tumbled as the world dealt with the highest levels of inflation in decades. Notably, equities were also down 25% in 2022. In the following year, as equity markets made new highs, bitcoin also followed and made new highs as well.
Despite this relationship, Mitchnik believes that historically, bitcoin has demonstrated very little correlation to stocks. He attributes the recent rally to excitement around the launch of bitcoin ETFs in the US. In terms of allocation, he recommends between 1 and 3% for investors to provide diversification and differentiated returns. The argument about bitcoin’s nature is germane for investors who want to understand whether it will make their portfolio more risky or more diversified.
Finsum: There are two camps when it comes to bitcoin. One sees bitcoin as an asset that is closely correlated to equities; while the other believes that bitcoin is more like gold and can help diversify portfolios.
Invesco recently completed its Q1 update on the landscape for alternative assets. In terms of private credit, the firm sees an improving environment due to a resilient economy, inflation trending lower, rate cuts later in the year, and expectations of liquidity events in private equity. Overall, it sees investors able to get attractive yields without compromising on credit quality. It expects overall yields to remain between 11 and 12% for the year for private credit investors.
The firm sees opportunity in distressed debt and special situations to lend to ‘good companies’ with weakened balance sheets. It believes the higher rate environment has hurt smaller companies and that many of these companies are operationally sound but are ‘liquidity-constrained’, creating an opportunity to invest at attractive valuations.
In terms of real assets, Invesco notes that fundamentals remain strong, for the most part, despite lower transaction volume and stresses created by the high-rate environment. It’s particularly bullish on real estate due to improving monetary conditions, which should support transaction volumes. Even during the downturn, income fundamentals remained robust across most categories. The firm sees sound fundamentals in most areas of real estate except for offices and overbuilding in some markets. Additionally, recent economic data has been supportive of a ‘soft landing’ for the economy, which is also bullish for real estate.
Finsum: Invesco shared its thoughts on alternative assets. Overall, it’s bullish on the asset class and sees the most upside for real estate and private credit due to its positive forecast for the economy in 2024.
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Blackstone is the largest alternative asset manager, with over $1 trillion in assets as of the end of last year. According to FactSet, Blackstone has a 19.7% revenue share of the diverse alternative investment market.
In total, it has stakes in 230 companies and around 12,500 real estate assets. While high interest rates and a significant slowing in IPOs and dealmaking have hurt many financial stocks, alternative asset managers are an exception, with a 45% gain in 2023, outpacing the S&P 500’s 24% increase. Blackstone climbed nearly 70%.
Blackstone is bullish in 2024 as it sees a bottom in real estate and an improved environment due to the Fed cutting rates. However, it doesn’t see a V-shaped recovery. Instead, the firm anticipates a longer period of bottoming out when there could be more dislocations.
Weakness in real estate is reflected in Blackstone’s results, as 2023 earnings were down 23% from the previous year. Real estate revenue was down 51%. Its two major real estate funds were down 6% and 4% for the year, respectively. As a result, the firm only spent $15 billion on real estate investments, down from $47 billion the previous year.
Finsum: Blackstone is the leading alternative investment manager in the world. Its stock was up nearly 70% in 2023, despite a double-digit drop in earnings. The company is bullish in 2024 due to the anticipation of a bottom in real estate and improved conditions with lower rates.
On January 10, the SEC approved 11 spot bitcoin ETFs. Vanguard quickly made the decision to not offer a bitcoin ETF. The decision has been met with resistance from customers. Recently, CEO Tim Buckley provided more insight into this decision, given that this has been a constant source of inquiry.
Overall, the firm doesn’t believe that bitcoin is a suitable investment option for a retirement plan, given the asset’s volatility and speculative nature. Buckley also rejects the notion that bitcoin is a 'store of value’, pointing to its severe declines in the past and correlation with equities. For example, bitcoin dropped from $69,000 to $16,000 between 2021 and 2022, while the S&P 500 was down 21% during this period from peak to trough.
Buckley added that he doesn’t believe that Vanguard will offer a bitcoin ETF until something significantly shifts in the asset class. In contrast, Vanguard only invests in asset classes with underlying cash flow. With equities, this refers to the future earnings of a company. For bonds, it can be calculated through a bond’s coupon and principal. Since bitcoin has failed to function as an effective ‘store of value’ and generates no cash flow at the moment, it remains purely a speculative asset, which makes it inconsistent with Vanguard’s principles and ethos.
Finsum: Vanguard is not offering a bitcoin ETF, unlike many of its major competitors. CEO Tim Buckley shared why bitcoin is more of a speculative asset and unfit for long-term investing.
The U.S. has an extended history of periods of financial regulation, specifically trust-busting. That period has been in hibernation though for the last 50 years, that is, until now. Many judges in the United States may be getting a slue of cases related to similar topics with mergers and competition as Private Equity has extended its ownership to unprecedented levels. There is more alignment than ever within the administration on the future of competition and private equity when it comes to policy. They are pursuing new readings and interpretations of longer-standing precedents that will be more stringent on PE. This new strain of regulation has long-standing Democratic Economists like Larry Summers voicing concern, calling the new policies ‘populist antitrust’.
Finsum: There have been a large number of papers on the effect of co-ownership and competition that private equity companies are imposing, and that could be reaching its peak.