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Investors face a fast-changing and challenging environment, but alternatives can help them mitigate risks and capitalize on new opportunities.


The global economy is in transition from a period of decade-high inflation to disinflation, from tight to normalized monetary policy, and from recession concerns to growing expectations for modest growth.


This has been a challenging backdrop for investors, with traditional asset classes of stocks and bonds rising and falling together. A conventional balanced portfolio of stocks and bonds has failed to provide the diversification needed during the rapid rise of inflation and interest rates.


Instead, investors must seek out investments that can maintain their purchasing power, provide less interest-rate sensitive sources of income and offer exposure to new areas of growth.


While we believe traditional asset classes will continue to be the foundation of investment portfolios, the expanded opportunity set of strategies alternatives can provide is too great to ignore.


At BNY Wealth, we have looked across the landscape of alternatives and identified four strategies that investors should consider to generate new sources of income, hedge inflation, dampen volatility and maximize growth opportunities.


Private Credit: A New Source of Income

Many financial institutions have pared back on lending while tightening credit standards, creating an opportunity for private lenders to provide loans to mid-size and smaller companies in need of capital.


Private credit can generate consistent income and attractive risk-adjusted returns as compared to traditional fixed income. Unlike investment grade and high yield bonds, private debt tends to be floating rate, making it attractive in an elevated rate environment. The negotiated nature of private loans results in stronger lender protections, which historically have led to higher recovery rates on defaulted debt as compared to high yield corporate debt.



Real Assets: Inflation Protection

Although the pace of inflation has moderated over the past year, disinflation has slowed due to stickier price components such as housing. This suggests that the last mile of achieving price stability is proving to be the hardest.


Investments in real assets, such as real estate and infrastructure, have substantially outperformed 60/40 portfolios in past periods of higher inflation. For example, long-term leases for industrial assets include annual adjustments generally linked to inflation. Multi-family leases are short-term with rents that reset often and keep pace with inflation. Investments in traditional infrastructure (such as toll roads and utilities) and non-traditional infrastructure (such as cell towers and renewable energy) often have built-in inflation hedges, providing explicit protection. 



Hedge Funds: Dampening Volatility


The volatility of many asset classes has risen as investors digest the impact of persistent inflation, higher for longer interest rates, an uncertain path of monetary policy, and increased geopolitical tensions.


These dynamics have been challenging for diversification, with stocks and bonds moving in tandem during both the 2023 bull market and the 2022 bear market. As a result, investors need non-correlated assets that can reduce volatility and limit losses during market downturns.


Allocating to hedge funds with complementary strategies can help mitigate portfolio volatility. Market neutral, long/short equity and relative value hedge funds have historically delivered consistent returns, with significantly lower volatility and lower correlation to the public markets over market cycles, as a result of their neutral portfolio positioning.


Strategies such as global macro – which may utilize long or short positions in equities, fixed income, currencies and commodities to express views on macroeconomic and geopolitical trends – allow investors to take advantage of increased volatility and market dislocations.



Private Equity: Investing in Innovation

Opportunities for growth are harder to find because the bulk of growth and innovation is happening during the private stages of companies’ lives. With the number of private-backed companies now five times the number of publicly traded companies, investors need to invest in private equity to capture long-term growth opportunities.


One such area of innovation is artificial intelligence (AI). This technology will ultimately impact every industry, creating a huge potential for growth, as well as existential threats for those who fail to keep up with developments. AI should also help to drive further innovation in other areas that already present exciting opportunities, from health care to the energy transition.    


Private equity (PE) investing is increasingly crucial for access to innovators at an early stage and at lower valuations. Investors should look to funds that offer venture capital (VC) and growth equity (GE) opportunities in businesses that are innovators or early adopters in emerging technologies. Current VC and GE vintages are well positioned to support and profit from future winners in fields from artificial intelligence, healthcare and e-commerce.


Learn More


Today’s investment challenges present an opportune time to explore alternatives. We think they can help diversify your portfolio, offer new income sources beyond traditional fixed income or dividend income, and uncover new sources of return.


For more information on how alternatives can enhance portfolios in this challenging market environment, BNY Investments launched Alternative Investments 2024: Eight Themes Steadying the Path of the 60/40 Portfolio. In this report our experts offer insights into eight cyclical and secular themes shaping the investment landscape. Over time, we believe incorporating alternatives can help you better meet your goals with less volatility.



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