There is currently some $6.2 trillion held in alternative investment classes worldwide. And if 2020 has taught us anything, it’s that you never know what’s going to happen in traditional asset classes, like stocks and bonds. One international event can change everything.
We’ve seen that in different places across the world. For instance, at Savant Capital Management, clients moved 10-20% of their portfolios into alternative investment strategies as a result of the COVID-19 pandemic. Preqin, a research firm, surveyed investors and found that while short-term strategies may change, investors ultimately believe that COVID-19 won’t have a long-term impact on how they invest in alternative asset classes.
This may provide some momentum for people who are looking into alternative investment classes. But not every investment strategy is alike. Some alternative investments may see success—but others may be in trouble. What will 2021 bring? Which alternative asset classes will get hit hardest? Which will represent the biggest opportunities? Here’s a brief forward-looking guide to alternative investment classes in 2021 and beyond:
How COVID-19 Affected Investor Behavior
In a Mercer report on how COVID-19 impacted investor behavior—especially as it relates to alternative investment classes—there were some interesting trends:
Which Alternative Investment Classes Will Be Hit Hardest?
Given what we know about investor psychology and the impact of COVID-19, what are the alternative investment classes that could struggle the most after COVID-19? Let’s look at those asset classes with clear short-term risks:
Which Alternative Investment Classes Might Succeed After COVID-19?
One to watch here: precious metals.
Gold and silver are seen as “safe haven” investments that provide additional financial security that diversifies out of other “security blankets” like cash and bonds. Investors often turn to gold and silver when there are highly uncertain geopolitical events rocking the world.
Investors did as much during the COVID-19 pandemic, as the price of gold soared. Even earlier in the year, the U.S. Mint sold more ounces of American Eagle gold coins than it did in all of 2019.
On December 31st, 2019, the price of gold was about $1,523 per troy ounce. It hit a new all-time high in August of 2020 at the price of $2,067. The price of gold hovered in the $1,900-$2,000 range. During a rocky U.S. election week, gold prices once again soared, moving from the $1,880 range back into the mid-1900s.
One potential reason investors flock to precious metals is declining faith in the U.S. dollar. The U.S. national debt continued to increase throughout the COVID-pandemic, with high-spending measures such as economic stimulus passing through Congress. Many precious metals investors believe this is good for the asset class.
Another unusual investment class that seemed to perform well during COVID-19 was that of unlisted infrastructure funds. One data firm even saw that these funds raised $38 billion during the first quarter, the third-highest total on record for the sector.
“Investors seem keen to commit money to infrastructure,” said Institutional Investor. “Just under a third of investors surveyed by Preqin said they planned to commit between $100 million and $499 million to the asset class over the next 12 months.”
Where the World Goes From Here
No investment asset class is immune from risk. Stocks—which generate traditionally high returns—also have associations with volatility. An individual real estate property might generate solid returns, but it’s subject to the economic conditions of its location.
That means it can be difficult to predict where the world goes in a Post-COVID world. However, there are some things worth noting.
Philip Palumbo of Palumbo Wealth Management sees some problems with stock investments as a whole, over the next decade. Said Palumbo: “I think returns for stocks will be below historical norms for the next 10 years…Today is similar to the period in the markets right after the tech bubble blew up in 2000, and for the next 10 years alternatives beat the public markets.”
Palumbo Wealth Management isn’t the only organization seeing reasons for optimism in stocks. JPMorgan expects another short-term surge in stocks by early 2021, looking for an approximate 11% gain. In a longer trend, JPMorgan sees the Federal Reserve’s “supportive monetary-policy stance” as a reason to believe stock valuations will remain high in 2021 and perhaps longer. BusinessInsider points to “value stocks beaten down by the coronavirus pandemic” as a source of optimism in the future. Alternative investment classes similarly “beaten down” by COVID-19 may enjoy a similar outlook.
If that’s the case, it may be that alternative investment asset classes will see more enthusiasm over the next decade. What that means specifically for the price of gold, real estate, and private equity investments is difficult to predict. But there are some areas in which alternative investments may be more predictable than even traditional investments. Commercial real estate, for example, may be fundamentally changed by an increasingly digital world.
We can’t make any predictions, but we can observe where the needles are pointing us. In the case of COVID-19, some asset classes may help investors feel more secure about their portfolios—while others may appear ripe for avoiding.