Alternative investments, like venture capital and private equity, have been around for decades. But the process for investing in these assets is still incredibly antiquated.
The first step, sourcing deals, is often done through personal relationships and networking. Once a potential deal is found, a non-disclosure agreement (NDA) must be signed to access the investment materials. Then, the due diligence process begins.
This is where things can get really cumbersome. Potential investors must fax over their subscription agreement and personal information to the fund manager. A first-round bid or non-binding term sheet is then drafted and sent back to the potential investor.
Once further due diligence is completed and both parties are happy with the deal, a preliminary investment memorandum (PIM) is sent out. If the potential investor wants to move forward, they must then engage a lawyer to review the PIM.
The final step is investment committee approval, after which wire instructions are sent out to the investor. The entire process is still done manually and is incredibly time-consuming. It’s not uncommon for the whole process to take months or even years.
But things are finally changing. A number of startups are working on making the alternative investment process more efficient and modern. Gridline has developed an online platform that allows investors to access alternative investments, including private equity, with a few clicks.
While it will still take some time for the industry to catch up, it’s clear that the days of faxing over subscription agreements and personal information are numbered.
The legacy approach to alternative investing is cumbersome, time-consuming, and outdated, which limits many individuals’ ability to access these types of assets.
Gridline has developed an online platform that makes it easy for investors to discover, track and invest in alternative assets. The platform is simple and intuitive and allows investors to quickly register and deploy capital.
Gridline has also digitized the entire process, from sourcing deals to investment committee approval. This streamlines the process and makes it much easier for potential investors to get involved.
The future of alternative investing is digital, efficient, and open to everyone. With Gridline, gone are the days of faxing over documents and waiting months for a deal to go through.
We’ve written about the many benefits of alternative investments, but one of the biggest is the potential for high returns. Private markets have significantly outperformed public markets for the past two decades, and investors are taking notice. In 2021, global private equity fundraising hit a record $733 billion, and 2022 is on pace to exceed that.
Institutional investors are allocating more of their portfolios to private equity, real estate, and other illiquid assets as they chase higher returns. And it’s not just pension funds and endowments; even insurance companies and sovereign wealth funds are getting in on the action. Not only that, but alternative assets like venture capital have a low correlation to traditional asset classes, providing much-needed diversification.
In a world with rampant inflation, low-interest rates, and political uncertainty, alternative investments offer a unique opportunity to generate real returns. So it’s no wonder that they’re becoming more popular every day.
However, accessing these types of investments has been difficult, if not impossible, for many individuals. This is where Gridline comes in. By making alternative investing more efficient and accessible, we’re opening up these types of assets to a wider range of investors.
This democratization of access to alternative investments has the potential to change the landscape of investing, and we’re excited to be at the forefront of this shift.
As recession fears mount, the tech industry has been especially hard hit. The war in Ukraine, 40-year highs in inflation, and an interest rate turnaround are all taking their toll. The industry is now bracing for a historic slump, with VC firms pulling back, layoffs looming, and share prices plummeting.
For the past few years, the industry has been on a tear, with companies like Apple, Amazon, and Google seemingly invincible. But now, those same companies are facing serious headwinds.
Apple, for example, is down $500 billion from its peak market value in January, despite posting record revenue. Microsoft, Amazon, Tesla, and Alphabet have all lost more than 20 percent of their value this year, while Netflix has lost a staggering 70 percent.
Another notable casualty has been Facebook, which is down 40 percent this year. The social media giant recently announced that it would freeze hiring, and it’s not the only one cutting back on costs.
Start-ups have also been hit hard, with around 30 companies laying off employees since the beginning of April, according to Layoffs.fyi, which tracks layoffs in the tech industry.
With major companies shedding talent, skilled workers are increasingly striking out on their own. This “shake out” of great talent could lead to a surge in innovative new startups over the next few years.
For early-stage investors, this presents a unique opportunity to get in on the ground floor of some potentially groundbreaking companies. In other words, a “dip” in the market may actually be a great time to invest in the next generation of tech companies.
Similar to public markets, private markets experience a decrease in value during an economic recession.
This VC pullback can have a big impact on startup funding. When VCs are less active, it can lead to lower valuations and fewer rounds of financing for startups. As a result, many startups are forced to scale back their operations or even shut down entirely.
One major VC slump was during the dot-com crash of the early 2000s. This downturn led to the demise of many multi-billion-dollar startups, including Pets.com and Webvan.
However, the dot-com crash also gave birth to some of today’s most successful companies, such as Google and Amazon. So while a VC pullback can be devastating for some startups, it can also create opportunities for others to thrive.
Moreover, VC pullbacks are neither as deep nor as prolonged as public market slumps. Research by Neuberger Berman Group highlights that private equity funds fared better than public markets in the dot-com bubble and the Great Financial Crisis.
If you’re thinking about investing in tech startups, the current market conditions may actually be in your favor. With VC activity down, startups are more likely to be open to accepting financing at lower valuations. This means you can get in on some potentially great companies at a discount.
Of course, it’s important to do your homework before investing in any startup. But if you’re patient and pick your investments carefully, the current market conditions could be a great opportunity to score some big wins in the years to come.
Diversification is key, and Gridline’s platform enables access for individual investors to gain diversified exposure to non-public assets – crucial in today’s market landscape.
2020 and 2021 witnessed unprecedented quantitative easing to pull economies out of a pandemic-induced downturn. The printing presses were running around the clock and it worked, leading to an incredibly fast economic recovery and a soaring bull market.
After seeing inflation spike to four times the target, central banks have taken their foot off the gas, and are now going in the other direction. They are tightening monetary policy and withdrawing stimulus, leading many to worry about another economic downturn.
Historically, out of 9 recessions since 1961, interest rate increases have led to a recession 8 times. With the US Fed increasing rates by the largest amount in 22 years, and many more central banks following suit, it’s no wonder that people are worried about a repeat of the past.
Private markets, however, can provide resiliency in downturns. They are not as vulnerable to the same interest rate volatility as public markets, and they offer opportunities for investors to make money when others are losing it.
When the economy takes a turn for the worse, private equity investors can take solace in the fact that their investments have historically outperformed public equities during downturns.
This was borne out during the dot-com bubble of the early 2000s and the Great Financial Crisis (GFC) of 2007-2009. Private equity funds fared better than public markets in both cases, with a less significant drawdown and quicker recovery, as shown in a Neuberger Berman Group study.
During periods of economic uncertainty, private equity’s focus on long-term value creation can be a major advantage. Private equity firms are not as beholden to the ups and downs of the stock market and can take a more patient approach to investments.
In addition to outperforming stocks in periods of economic decline, private equity has also proven to be more resilient to catastrophic loss.
As an Investments and Wealth report highlights, only 2.8% of buyout funds experienced catastrophic loss during recessions, while 18% of buyout deals lost 70% or more of their paid-in value. In comparison, 40% of stocks experienced catastrophic loss during the same periods.
There are several factors explaining PE’s outperformance during recessions. One is that private markets are characterized by longer holding periods than public markets, which allows for a more patient and active investment strategy. Further, PE firms have an asymmetric information advantage, with access to a deep bench of talent and resources. Additionally, PE firms are typically well-capitalized, with dry powder that can be used to alleviate financing concerns and help renegotiate loan terms and debt obligations.
Moreover, the common buy-and-build approach used by PE firms can be particularly effective in down markets. This approach allows for the acquisition of add-on businesses at low prices, which can then be integrated into the portfolio company to drive efficiencies and cost savings. Additionally, sector specialists with experience in a specific industry are often able to navigate through market cycles better than generalist investors.
Finally, the relative illiquidity of private markets can actually be protective in times of economic downturn. This is because panic selling is less common in private markets, as investors are typically more committed to the long-term success of the investment.
Average investors consistently earn below-average market returns. Why? Mainly because they don’t know how to build wealth.
Instead of a long-term view, they focus on the short-term, chasing performance without an understanding of how to diversify their risks appropriately. They don’t take an active role in managing their assets or think about how to generate operational alpha. And as a result, they end up with less resilient portfolios with poorer long-term returns.
Not only that, but the investment landscape has become more challenging in recent years. Flat to negative yields, rampant inflation, and the likelihood of a 60/40 portfolio returning just 3% means that average investors have to become savvier about building wealth.
Fortunately, there are some tried and tested ways individuals can build wealth, even in these challenging times. The CAIA Association has outlined five marks of effective investing:
Diversifying your portfolio across different asset classes, geographies, sectors, and purposes is one of the best ways to mitigate risk and build wealth over the long term. Investing in a diversified mix of assets can weather market volatility and shocks better than if you had all your eggs in one basket.
And with the current low-interest-rate environment, there are plenty of opportunities for diversification outside traditional investments like stocks and bonds. For example, you could consider investing in alternative assets such as private equity, venture capital, and commodities.
Some alternative asset classes, like venture capital, have low or even negative correlations with public markets, which can help diversify your portfolio and smooth out returns. Private markets have outperformed public markets in the long run, with 90% of LPs saying that private equity will continue to outperform public markets in the coming years.
This is of particular importance given the current state of the economy. We’re amidst a long bull market, and many experts predict a recession in the next few years. If that happens, private equity will likely outperform public markets again, as it did during the last two recessions.
As a Cliffwater examination of PE investments in 16 years (encompassing two bear and two bull markets) shows, PE outperformed public equities by 440 basis points annually on average. And another analysis of median net IRRs of U.S. buyout funds confirms private equity’s outperformance during economic downturns.
So if you’re looking to protect and grow your wealth in the future, investing in private equity is smart.
It’s important to remember that not all asset classes are created equal. In recent years, private markets have outperformed public markets and become an increasingly attractive option for long-term wealth building.
The numbers show tremendous potential in private equity. A recent study by Hamilton Lane found that private equity funds generated an extra 83 cents on average per dollar invested since 2017. That’s a significant outperformance compared to the public markets. Not only that, but the study found that over the past 12 years, the majority of private equity funds have outperformed their public market equivalents.
This is another reason to consider allocating a portion of your investment portfolio to private equity. With its ability to generate solid returns and provide downside protection, private equity can be a powerful tool for long-term wealth creation.
One reason is that private companies are typically less exposed to market volatility than public companies. They also offer the potential for higher returns since you get a piece of the company’s growth instead of just the dividends or interest payments on its debt.
Of course, investing in private companies is generally more illiquid than investing in public companies. That means you must be prepared to commit your capital for the long term – at least five to seven years – to see any real return on your investment. But if you’re patient and can stomach short-term volatility, a heavier weighting towards private markets can pay off handsomely over time.
When it comes to wealth building, having a fiduciary mindset is essential. That means always putting your financial interests first and making decisions based on what’s best for you, not what’s best for the person selling you an investment product.
A lot of so-called “financial advisors” are salespeople in disguise. They’re more interested in making a commission off you than in helping you build wealth. So be sure to find a fee-only financial advisor legally bound to act in your best interest. This way, you can rest assured that the advice you’re getting is genuinely in your best interest – not theirs.
In today’s world, investing your money and hoping for the best is not enough. You need to actively manage your assets and engage with the companies you invest in.
This is especially important regarding sustainability factors like carbon footprint and progress on diversity, equity, and inclusion (DEI). More and more institutional investors are starting to integrate sustainability considerations into their investment decision-making process, and as an individual investor, you should too.
Amidst more significant concerns around climate change and social inequality, investors are increasingly looking for opportunities to invest in companies making a positive impact on the world. A recent study by Gartner found that 85% of institutional investors consider ESG factors when making investment decisions.
According to Reuters, this trend is borne out in the numbers: inflows into ESG funds reached a record $649 billion in 2021 (excluding December). And there’s a good reason for this – companies with firm ESG profiles are more competitive than their peers.
Don’t fall behind – integrate sustainability considerations into your investment process today. It’s not only the right thing to do but will also put you ahead of the curve in terms of identifying leading companies that are primed for success in the years to come.
One of the best ways to generate wealth is to focus on generating operational alpha. That means using big data and cutting-edge technology to support functions like risk management and operations.
By taking an active role in managing your assets and using data-driven insights to improve your investment strategy, you can add real value to your portfolio. And that value will compound over time, helping you build substantial wealth over the long term.
Suppose you’re looking for an efficient way to gain diversified exposure to non-public assets with low capital minimums, lower fees, and greater liquidity. In that case, Gridline is a digital wealth platform that’s worth considering. Gridline provides access to a curated selection of professionally managed alternative investment funds, letting investors and advisors build diversified portfolios of private market assets.
Success in investing isn’t just about selecting suitable investments – it’s also about having access to the best ones. That’s why access-constrained funds, or those with access to privileged opportunities, tend to outperform their peers.
In today’s Private Equity market, funds of funds and other financial intermediaries can create value not only by selecting but also by being able to access the best investment opportunities.
Pundits often criticize investing minimums, viewing them as a way to keep retail investors from committing capital. While this may be the case in some instances, we believe that, generally, investing minimums exist for a fundamental reason: to ensure that only sophisticated investors with a long-term orientation can commit capital.
The first access constraint is a minimum committed investment, which reaches as high as $25 million. The high minimum investment size means that many smaller investors are excluded from committing to the best-performing funds. The second access constraint is the number of investors in a fund, which is typically limited to between 10 and 20.
The high minimum investment size and the limited number of investors in a fund are two key factors that lead to outperformance. By restricting the number of available investors, GPs can avoid the crowding effects that lead to downward pressure on returns. In addition, by only allowing sophisticated investors to commit capital, GPs can avoid short-termism that can lead to suboptimal decision-making.
The combination of these two factors – the high minimum investment size and the limited number of investors – leads to a situation where GPs can access more exclusive investment opportunities and are more likely to make successful investments.
Access-constrained funds have a proven track record of outperforming their peers, and LPs with access privileges tend to recommit to these types of funds. If you’re looking to invest in private equity, don’t just focus on who’s making the investments – also consider who has access to the best opportunities.
Alternative investments are becoming more mainstream, with retail investors flocking to riskier assets in search of higher returns. However, these investors typically invest for relatively short-term goals: to make a quick profit and move on to the next opportunity.
Study after study confirms that retail investors dramatically underperform the market and professional investors over the long term. Further, as a UCLA analysis reveals, aside from “meme stocks” like GameStop, retail investors are terrible at momentum investing and consistently underperform. Why is this?
There are several reasons, but one key reason is that retail investors don’t have access to the best investment opportunities. They lack the relationships, knowledge, and experience to identify and access the best deals.
In contrast, the investors in access-constrained funds are sophisticated institutional investors with a long-term orientation. These investors are more likely to be patient and take a hands-off approach, giving GPs the time and space they need to make successful investments.
Moreover, private equity fund terms are lengthening, and “some funds now permit extensions for an indefinite number of successive one-year periods.” This trend is likely to continue as LPs are becoming increasingly comfortable investing for the long term.
The idea of an “unlimited time horizon” is also limited to institutional investors who can commit large sums of money for long periods. For retail investors, even a ten-year time horizon can be daunting.
The importance of a long-term orientation is reflected in the very nature of Private Equity returns, which typically follow a J-curve.
The J-curve is a graphical representation of the typical path of a private equity investment. In the early years, the investment loses value as the PE firm incurs costs to acquire and turn around the business. In the later years, the investment gains value as the business improves and is sold for a profit.
Because of the J-curve, investors in PE need to be patient and have a long-term time horizon to realize the total potential return on their investment.
SoftBank’s Vision Fund is an apt example of the J-curve at work. The fund, which was launched in 2017, was expected to lose $24 billion in 2020. However, the fund’s backers remained confident in the long-term strategy and remained patient for the J-curve to play out. In 2021, the Vision Fund’s critics were proved wrong as the fund reported a $45 billion group net profit.
The investors in access-constrained funds are typically a very select group of institutional investors, many of whom have known each other for years. This exclusive group is incentivized to maintain good relationships as they compete for a limited number of high-quality investment opportunities.
The result is a “stickier” investor base, which is much less likely to redeem its investments early. This sticky investor base gives GPs the time and flexibility they need to make successful investments without worrying about the short-termism that can plague other investors.
In addition, this exclusive group is typically very well-informed about the private equity market and has a deep pool of knowledge to draw upon. This allows them to make better-informed investment decisions and helps to improve returns further.
In the “passive” versus “active” debate, it’s essential not to forget that not all active strategies are made equal, and those with access constraints have a clear edge.
Passive strategies, such as index funds, are based on the premise that it is difficult to “beat the market.” However, this logic does not apply to private equity, where the best-performing funds are often those with access to the most privileged opportunities.
Many of the world’s best investors, such as Warren Buffett and George Soros, have made their fortunes by investing in opportunities unavailable to the general public.
Therefore, when it comes to private equity, access constraints matter. To achieve superior returns, investors need to access the best opportunities, which can only be done through active, access-constrained deployment.
Gridline is a digital wealth platform that provides a curated selection of professionally managed alternative investment funds. It enables individual investors and their advisors to gain diversified exposure to non-public assets with lower capital minimums, lower fees, and greater liquidity.
With Gridline, you can access the best opportunities in private equity without meeting traditional funds’ high capital minimums. And because Gridline only works with experienced fund managers, you can be confident that your money is in good hands.
So if you want superior returns in private equity, ensure you have access to the best opportunities. With Gridline, you can.
Alternative investments are all asset classes outside the traditional stocks, bonds, and currencies. That leaves an incredibly broad range of asset types to consider, including venture capital, private equity, real estate, and cryptocurrency, each of which has various sub-categories.
The key to successful alternative investing is to find high-quality assets that fit your investment goals and objectives. Once you’ve done that, you need to develop a strategy for how you’ll allocate your capital across different asset types.
And finally, it’s important to remember that alternative investments should only make up a small portion of your overall portfolio. They should be viewed as a way to diversify your holdings and reduce overall risk.
Diversification is a key tenet of investing, and alternative investments offer a powerful way to achieve it. Investing in a wide range of asset types can minimize your exposure to any particular risk.
For example, let’s say you have a heavily invested portfolio in the stock market. If the stock market were to experience a sharp decline, your portfolio would also likely take a hit.
But if you diversify with alternative investments, you can offset some potential losses you might incur in the stock market. For instance, if you invest in real estate, you’ll likely benefit from stability and growth in the value of your properties even if the stock market declines. For example, if you’re worried about a potential decline in the stock market, you could invest in cryptocurrency, which has a relatively uncorrelated relationship with traditional assets. Alternatively, investments can also hedge against downside risk in your portfolio.
The bottom line is that alternative investments offer a unique way to achieve a wide range of investment goals.
Of course, simply investing in alternative assets isn’t enough. You must also develop a strategy for allocating your capital across different asset types.
The most important thing to remember is that you shouldn’t put all your eggs in one basket. Just because you’re investing in alternative assets doesn’t mean you’re diversified.
For example, let’s say you invest all your money in real estate. While real estate can be a great investment, it’s still subject to market fluctuations. So, your entire portfolio will be impacted if the real estate market declines.
To properly diversify your portfolio, you must allocate your capital across various asset types. If one asset class experiences a downturn, your other holdings will offset some losses.
A well-diversified portfolio should include a mix of traditional and alternative investments, including private markets. For the average individual investor, accessing top-tier, actively-managed funds can be difficult due to high minimum investment requirements.
However, with a Gridline Thematic Portfolio product, you can invest 5-10 institutional-grade funds for just $100,000. This allows you to build a more diversified, resilient portfolio focused on long-term wealth creation. Additionally, by actively engaging with your assets, you can generate operational alpha and improve risk management.
The takeaway is that you need to have a strategy for allocating your capital across different asset types. Without a plan, you’re simply guessing, a recipe for disaster. With the right strategy and a high-quality selection of alternative investments, you can build a diversified portfolio that will help you achieve your financial goals.
In 2020, TechCrunch reported that Softbank expected $24 billion in losses from its Vision Fund, founded in 2017, saying that founder Masayoshi Son “was too enamored of the mythology he’d created around himself as a maverick and a visionary.”
These harsh words aged poorly, as the following year, Softbank landed the biggest profit in the history of a Japanese company—over $45 billion in group net profit year-over-year, topping even the profit made by Warren Buffet’s Berkshire Hathaway.
What happened? In a word, the J-Curve.
In finance, the J-Curve is the graphical representation of how an investment’s short-term performance can belie its long-term potential. Simply put, the J-Curve is the time it can take for an investment to show returns.
In the case of Softbank’s Vision Fund, the initial losses were quickly overshadowed by the fund’s eventual profitability. And while it’s still too early to declare the Vision Fund a complete success, the early returns are certainly encouraging.
Of course, not all investments follow such a smooth path to profitability. For many, the road to the J-Curve ends before the growth phase. But the rewards can be immense for those with the patience and fortitude to weather the storm.
Investors in a private equity fund may find themselves in the position of having committed capital to a fund with a 10-year holding period. At the end of that holding period, the fund can be liquidated and the proceeds distributed to the investors.
However, the fund’s investors don’t necessarily have to wait 10 years to reap the rewards of their investment. Instead, they can choose to exit the investment early through a process known as a secondary market sale.
A secondary market sale is when an investor sells interest in a private equity fund to another investor, ideally at a price above the original investment. Of course, selling on the secondary market is not without risk. By selling early, an investor gives up the potential upside of the J-Curve.
Softbank’s Vision Fund is a perfect example of that potential upside. Had investors in the fund sold on the secondary market after the initial losses were reported, they would have missed out on the fund’s eventual profitability. The key, then, is to find an investment with the potential to follow the J-Curve and to have the patience and fortitude to hold on to that investment for the long term.
Entire volumes have been written about the J-Curve and its implications for investors. But the phenomenon is not limited to private equity and venture capital. The J-Curve can be seen in all sorts of areas, from trade balances to the path of nations from authoritarianism to democracy.
Investors would do well to keep the J-Curve in mind when making any investment. Even the most unlikely investment can eventually follow the J-Curve to profitability with a long enough holding period.
There are several ways to take advantage of the J-Curve. One is to invest in actively managed funds, which typically require a minimum investment of $500,000 per fund. For the average investor, this is out of reach. However, another way to gain exposure to these top-tier funds is through a Gridline Thematic Portfolio product, which allows you to invest in 5-10 institutional-grade funds for a minimum investment of just $100,000.
With Gridline, you can get the same exposure to top-performing actively managed funds as the large endowments, but at a fraction of the cost. This ideal way to take advantage of the J-Curve and potentially achieve outsized wealth creation.
The much-anticipated shift from the internet as we know it to a new decentralized web, often referred to as Web3, is underway. And while it’s still early days, investors already have several ways to get involved in this exciting new space.
So, what is Web3? Simply put, it’s a new, decentralized way of storing and exchanging data and value that is not controlled by any central authority. This new web is powered by blockchain technology, which enables a wide range of new applications and services that were not possible before.
Importantly, Web3 is not just a new way of doing things – it’s a wholesale shift in how the internet works. This shift can upend many industries and create a new wave of winners and losers. For investors, understanding Web3 is critical to making informed investment decisions in this space.
There are several ways to invest in Web3. The most direct way is to invest in blockchain-based projects and companies building the infrastructure for this new web. These include projects like Patientory, Elliptic, and Passfort, which work to create a decentralized infrastructure for the new web.
Another layer of investment opportunity is found in the applications of this new infrastructure. These firms are building applications and services on this new decentralized web. Some examples include Aave, Celsius, Uniswap, and OpenSea.
Finally, investors can also invest in more traditional companies that are beginning to embrace and integrate blockchain technology into their business models. These incumbents are looking to benefit from the shift to Web3. Some examples of incumbents include Microsoft, IBM, and JP Morgan.
Beyond investing directly in blockchain projects, blockchain-focused investment funds are another way to gain exposure to this space. These funds invest in various projects and companies in the blockchain space and provide investors with a more diversified way to gain exposure to this nascent industry.
These reduce risk by diversifying investments and offer the potential for higher returns by investing in various projects across the space. Some notable blockchain funds include 3AC, a16z, and Alameda Research.
Suppose you’re looking to take advantage of the growing opportunity in blockchain investing but don’t have many institutional funds’ sizeable minimum investment requirements. In that case, a Gridline Thematic Portfolio product may be a good option. These products invest in a basket of 5 to 10 institutional-grade blockchain funds, making it more accessible for the average investor. Instead of the traditional $500,000 minimum investment per fund, you can get started with as little as $100,000 across an entire basket of funds.
These private funds tend to be restricted to accredited investors, but there are several ways retail investors can get exposure to this space. For example, the Amplify Transformation Data Sharing ETF (BLOK) invests in a basket of companies building the infrastructure for Web3.
Even now, ETFs are focused on cryptocurrencies rather than just blockchain companies. The ProShares Bitcoin Strategy ETF became the first cryptocurrency ETF when it was approved by the SEC in October 2019. This ETF holds different Bitcoin futures contracts.
To be sure, investing in Web3 is not without risk. This is a highly volatile and speculative space, and there are no guarantees that any particular project or company will be successful. Investors should be prepared for wild price swings and only invest money they are comfortable losing.
That said, the potential rewards in this space are massive, and those who can identify the winners early on could see life-changing returns. Web3 is an exciting and potentially very lucrative investment opportunity for those willing to stomach the risk.
As an investor, you always seek ways to protect your portfolio from volatility and market downturns. One way to do this is by diversifying your investments into assets that don’t move in lockstep with the stock market.
These so-called “non-correlated assets” include private equity, real estate, and venture capital. While these investments may be riskier than traditional stocks and bonds, they can offer a hedge against market volatility.
More accurately, they might be called “less-correlated assets.” That’s because they may not always move in the same direction as the stock market; they’re still subject to the same economic forces.
One example illustrating alternative asset benefits is the dot-com bust of the early 2000s.
While the stock market plunged, certain alternative investments held up relatively well. For instance, private equity firms continued to make money by investing in companies out of favor with the public markets.
As Bain describes, “in the decade following the dot-com crash, the PME index’s annual return fell to 0.08%, while private equity maintained a 7.5% average.” So, while the stock market struggled to recover, private equity was still generating returns for investors.
Gold is often seen as a safe haven asset to park your money when the stock market is in turmoil.
Its low correlation to other asset classes makes it an ideal diversification tool. EquityZen writes that it correlated just 0.23 to the overall market between 2006 and 2015. The correlation is even lower in 2022, with a 14% correlation to the high-growth benchmark, ARKK.
And when the stock market is struggling, gold typically shines. For instance, gold prices soared when the stock market crashed in 2008.
Even less correlated to public markets is venture capital. VC is the investment of money in a new business venture, usually in the form of equity. It’s a high-risk, high-reward asset class, but it can offer big returns for investors.
According to an Invesco white paper, VC correlates -0.06 to large caps in the public markets. That means it’s uncorrelated or even slightly negatively correlated.
This makes sense when you think about it. After all, VC is investing in companies that are often too small or too new to be publicly traded. So, while the stock market may be struggling, VC can still be going strong. AngelList reaffirms these findings with an analysis of its data. It found a correlation of 0.0 between the gross monthly change in AngelList’s seed portfolio and the Nasdaq Index.
You need to invest in top-tier, actively managed VC funds to benefit from this. But these have high minimum investment requirements, often $500,000 or more.
For the average individual investor, this can be out of reach. Gridline offers a solution with its Thematic Portfolio products, which invest in 5-10 institutional grade VC funds. These have minimum investment requirements of just $100,000.
The debate around whether digital assets are correlated or uncorrelated to the stock market is ongoing. Fueling the uncertainty is the highly-volatile nature of the asset class.
However, a Nasdaq article points out that, in 2021, the peak 90-day correlation between Bitcoin and the S&P 500 was a mere 0.31, with a low of -0.04 in June 2021.
Further, altcoins can have an even lower correlation with the stock market. While these assets themselves are highly volatile, a small allocation to them could help reduce the overall volatility of a portfolio.
Alternative assets can offer a hedge against market volatility and downturns. They may be riskier than traditional investments, but they can offer higher returns and greater diversification. So, if you’re looking to protect your portfolio from the ups and downs of the stock market, consider investing in some alternative assets.
With the Federal Reserve raising interest rates for the first time since 2018, many investors are wondering how this will affect their portfolios. While higher rates can mean higher borrowing costs and increased volatility in the stock market, they can also lead to higher returns on certain investments.
Here’s what investors need to know about rising interest rates.
Rising interest rates can lead to increased volatility in the stock market. This is because when rates rise, it becomes more expensive for companies to borrow money. As a result, stock prices may fall as investors worry about the impact of higher rates on corporate profits.
This held true in the recent interest rate hike, with the Nasdaq 100 entering correction territory. Previously, low rates, and thus low bond yields, drove investors into riskier assets, which helped contribute to the outperformance of the S&P 500 in 2020 and 2021. This time around though, with rates on the rise, we’re seeing investors move out of stocks.
While rising interest rates can be bad news for the stock market overall, there are some sectors that actually benefit from higher rates.
For example, banks and other financial institutions tend to do well when rates rise because they can charge higher interest rates on loans. This includes the likes of banks, brokers, and insurance stocks.
Further, as a rising interest rate environment is associated with a strong economy, certain sectors like industrials and consumer discretionary stocks may also outperform. This is because improved employment and a healthier housing market lead to greater spending on big-ticket items.
Blue-chip investors looking for higher returns may also benefit from rising interest rates. For instance, short-term and medium-term bonds are less sensitive to rate increases.
2021 was an unprecedented year for private markets, with record-breaking inflows into venture capital. This was in part due to the low interest rate environment, as investors were seeking higher returns than they could get in the stock market or in bonds.
Now that rates are on the rise, we may see venture capitalists start to pull back on their investments. This could lead to a slowdown in the growth of private companies and a drop in the valuations of venture-backed companies.
That said, the impact likely wouldn’t be too severe. For instance, research from the European Financial Management Association showed that a 1% increase in interest rates “reduced venture capital fundraising by $647 million the following year—or about 3.2%.” While this doesn’t include the longer-term effects of higher rates, it does show that the impact of rising rates on venture capital isn’t as acute as some may think.
Given the potential impact of rising interest rates on investments, it’s important for investors to review their portfolios and make sure they are properly diversified. This means having a mix of investments that will perform well in different market conditions.
While there’s no guarantee that anything will outperform in a rising rate environment, by diversifying your portfolio and having a long-term investment plan, you’ll be in a better position to weather any market changes.
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