Bull market stampede not stymieing demand for alts

Should advisors be altering their alternative asset strategies now that the markets are repeatedly hitting new highs?

In 2022, the S&P 500 lost over 18 percent, sending investors screaming for the exits. Unfortunately, they couldn’t escape into bonds, because the so-called safe asset class was also spiraling downward with the Bloomberg Aggregate Bond Index finishing the year down 13 percent while yielding nothing along the way.

The answer for financial advisors back then was to take the money being yanked from publicly-traded stocks and bonds and shove it into to alternative investments, which are generally less volatile and not as responsive to the whims of a fast-moving market.

Any port in a storm, as they say.

Fast forward a scant two years, however, and investors seem to barely remember the pain they felt during those heady times. In fact, many are likely wondering why they are still seeing those alternative allocations on their account statements each month. Frankly, it’s hard to blame them with the S&P up 23 percent this year following a 26 percent return in 2023. Not to mention a 10-Year Treasury that’s offering a decent yield of 4 percent.

So what are financial advisors doing when it comes to those alternative investment allocations when, for all intents and purposes, the storm has passed?

Craig Warnimont, chief investment officer at Venture Visionary Partners, says he is seeing less overall interest in alternative investments as traditional investments keep performing well. That said, he still gets questions from clients about how they can continue to participate in the upside if the rally continues, yet still have some downside protection if the rally is close to an end. He’s also getting questions from clients about the best hedging strategies should “the wrong candidate” win.

“These are both difficult to answer but equity linked structured notes may play a role. A note can be structured to provide upside participation linked to a broad-based index, or even select individual stocks or sectors, with a level of downside protection built into the structure,” said Warnimont.

Meanwhile, Christopher P. Davis, partner at Hudson Value Partners, still prefers public over private, but says strong public market performance and attractive rates in liquid credit raise the bar for considering private markets exposure.

“We still find places in portfolios however for VC, RE, and PE exposure, especially for clients and trusts with the longest time horizons. We favor secondaries whenever we can in private markets,” said Davis.

Elsewhere, Craig Robson, founding principal and managing director at Regent Peak Wealth Advisors, believes that new highs in the equity market make this is an excellent opportunity for investors to revisit their portfolio allocations and risk profiles. In his view, trimming overweight asset classes, such as public equities, and repurposing the proceeds to other asset classes which may include alternative investments provides both portfolio governance and risk mitigation benefits.

“Here at Regent Peak Wealth Advisors, our investment committee sources and diligences new opportunities while monitoring existing strategies to ensure our relationships own best of class solutions. As there have been fewer exits like Trade sales or IPOs over the past 3 years, we are starting to see an uptick in private equity interest from the investor community,” said Robson.

Don Calcagni, chief investment officer at Mercer Advisors, for one, says client demand for alternatives is actually rising as clients are increasingly concerned about markets, the election, the economy, market valuations, and geopolitical instability. Further, he says many of today’s older investors have lived through multiple bear markets and are consequently less convinced that “buy and hold” is the best way to manage their wealth.

“Three alternative strategies that look particularly interesting right now include cash secured puts, semi-liquid private credit, and tax managed long-short hedge funds. The best approach would be to have these three strategies working together as part of a more broadly diversified portfolio and not, in contrast, deploying them in isolation,” said Calcagni, adding that private equity and venture capital are also “beginning to look more attractive for longer-term investors as interest rates come down.”

Finally, Michael Leverty, CEO of Leverty Financial Group, says despite equity markets reaching new highs, he continues to see demand from clients for alternative investments.

“At Leverty Financial Group, we believe alternatives play a vital role in building a resilient, long-term portfolio. These investments, particularly in Private Equity and Private Credit, offer clients exposure to unique opportunities that traditional markets may not provide. We focus on how these alternatives can enhance diversification, potentially reduce overall volatility, and provide attractive risk-adjusted returns over time,” said Leverty.