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.
A Historical Example: The Dot-Com Bust
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 and Precious Metals Today
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.
Venture Capital
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.
Digital Assets
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.
The Bottom Line
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.