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Inflation Will Persist. What are the options for Investors?

Inflation Will Persist.  What are the options for Investors?

Inflation has been a significant concern for investment professionals and their clients for the past several quarters. Stocks have fallen as the future earnings projections of many companies no longer seem as appealing to investors. Not only that but rising costs for everything from fuel to groceries to housing have everyone rattled and worrying about their financial future, sending ripples of fear through the markets.

Having a well-diversified portfolio is always one of the most important rules in investing, but in this inflationary environment, it is more important than ever. Normally, diversification acts as a type of insurance policy on your portfolio, but in this environment, having assets that don’t move in tandem with the market will protect investors and supercharge their returns.


Growing National Debt: A Catalyst for Inflation

The connection between a nation’s debt and the resulting inflation is inescapable. As illustrated by the recent US long-term budget outlook released Congressional Budget Office, federal debt held by the public relative to the size of the economy will nearly double within three decades, rising from 97 percent of GDP at the end of FY 2022 to 181 percent of GDP by 2053.  Mandatory spending grows from 73 percent of the federal budget today, to 77 percent in 2033, to 81 percent in 2053.

Debt Will Grow Rapidly as a Share of the Economy
Source: Congressional Budget Office The 2023 Long-Term Budget Outlook https://www.cbo.gov/publication/59014

The overarching narrative behind these numbers is that the deficit is on a trajectory to grow.

Recent events have once again shown that the US is brushing against its debt ceiling, signalling potential economic challenges. This will only be putting more pressure on the economy and exacerbate the already volatile market. But the bigger concern for investors should be the fact that this rising deficit is directly proportional to the mounting inflation, urging investors to reconsider their traditional approaches.


The Ripple Effect of Market Volatility

A direct consequence of inflation is its effect on market volatility.  For the longest time, the traditional portfolio was constructed with a 60/40 split between stocks and bonds. This strategy was underpinned by the negative correlation between these two asset classes, as one falls, the other would rise, creating a balance that naturally hedge each other.

However, in their attempt to curb inflation, the federal reserves and global central banks have pushed up their interest rates, causing bond prices to fall.  This means the traditional stock-bond correlation has now shifted from negative to positive. Now, when stock prices fall, bonds are following suit. This turn of events renders the conventional 60/40 strategy ineffective, pushing investors to think beyond the tried and true.

The Market’s Emphasis on Growth versus Inflation Could Impact Stock/Bond Correlation

Diversification away from market correlation

The volatility in this market necessitates the exploration of alternative investments that offer uncorrelated returns.  Such a diversified approach has historically produced returns that don’t mirror the broader market, ensuring a measure of safety against market downturns.

Investors looking at diversifying away from market correlation can look into the following options:

  • Multi-strategy funds.  Funds that employ a multi-strategy approach deliver consistently positive returns regardless of the directional movement in equity, interest rate or currency markets.
  • Real estate funds.  Real estate funds, especially funds that invest directly into land development is viable option as land is stable, finite, and holds its value through the ups and downs of the economy.
  • Relative value funds.  Relative value fund seeks to exploit temporary difference in the prices of related securities to achieve absolute return.  The manager of such fund is constantly on the lookout for arbitrage opportunities, as such they tend to perform when market volatility is high.
  • CTA & Commodities funds.  Funds that deal in CTA and commodities like natural gras is also a good source of uncorrelated returns as most returns are driven by the actual demand for the commodity, they are uncorrelated to the traditional market.


Addressing Liquidity Concerns in Alternatives

During times of volatility, liquidity is king.  But a common reservation about alternative investments is their perceived illiquidity. However, this notion doesn’t hold true across the board.

Enter FundKernel’s curated selection of liquid alternatives. These investment solutions provide the best of both worlds: they offer the high, uncorrelated returns that alternatives are known for, combined with the accessibility of monthly or quarterly liquidity options. For investors, this combination means a shield against inflation-induced volatility and the flexibility to access funds when needed.

Act Now to Shelter Your Clients’ Investments

The warning signs are clear. With inflation poised to persist and traditional portfolio strategies showing cracks, the time to act is now. By diversifying into well-selected alternative investments, financial advisors can better position their clients’ portfolios to weather the challenges ahead. And with platforms like FundKernel, ensuring this diversification while maintaining liquidity has never been easier. Safeguard your client’s future. Embrace the alternatives today.

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