U.S. equity indexes surged as velvet-rope assets, alternative strategies, and private equity showed middling-to-negative returns
For those with the ability to access them, exclusive investment opportunities in private equity, hedge funds, and luxury assets are usually a good way to diversify a wealth portfolio. But sometimes, the decision to shift toward alternative investments can result in acute investor’s remorse – and 2020 was a case in point.
The S&P 500 ended the year up 15%, while the tech-heavy Nasdaq index was up a whopping 43%. On the fixed-income side, the Bloomberg Barclays Global Aggregate bond index gained 9.2% on a total-return basis, making 2020 a banner year.
As reported by the Wall Street Journal, the unprecedented wave of monetary policy support and interest-rate cuts by central banks around the world put massive amounts of cheap money in investors’ hands. That proved beneficial to many stocks and bonds that rose to all-time highs as a result.
Some investors chose to channel more capital toward alternative investments, though their 2020 returns didn’t come close to those from traditional assets. Citing data from eFront, the Journal said private equity returns last year were -8.9% while venture capital dipped -1.4%. And while hedge funds provided valuable downside protection in the wake of the initial March downturn, data from PivotalPath showed their total 2020 returns at a comparatively unimpressive 6.3%.
Professor Steven Kaplan of the University of Chicago Booth Business School told the news publication that venture firms were able to hold up fairly well due to the COVID-accelerated adoption of technology. But within private equity, leveraged buyout firms were hurt: “If you have a hit to your cash flows, it’s going to get a bit magnified on the downside by the debt,” he said.
Returns on rarefied assets favoured in the high-net-worth space were similarly unimpressive when stacked up against stock indexes. Coloured diamonds, as monitored by specialist investment house Amma Group, were up 11%. Classic cars, according to Historic Auto Group International, were up 5.9%; founder Dietrech Hatlapa told the Journal that some owners put their automobiles up as collateral for loans and, more recently, smart buyers are snatching collectibles up as an inflation hedge.
Fine wine, based on data from Liv-ex, was up just 4.7% in 2020; collectible art, according to Art Market Research, fell -10.4% as the pandemic brought auction activity to a halt. “Collectors increasingly expected to pay ‘Covid-prices’ and average values were down by the end of the year,” said Art Market Research CEO Sebastian Duthy.
Of course, one could say any attempt to compare the returns of publicly listed U.S. stocks and alternative assets last year is not entirely fair; after all, the performance of U.S. equities last year was enabled greatly by the “doping” effects of stimulus from central banks and government. And if the words of David Rosenberg, founder of independent research firm Rosenberg Research & Associates, are anything to go by, it seems everyone’s gambling rather than investing.
“The Nasdaq has now enjoyed a 94-per-cent two-year surge, something that last happened in 1998-99. Take that for what it’s worth, but do remember that 2000 ushered in a completely different environment altogether and the same commentary then is in vogue today,” he said in a recent piece published on the Financial Post.
Calling the recent action in stock prices “obscene” – even as the U.S. entered the third wave of the pandemic, the S&P 500 jumped 3.7% in December and the small-cap Russell 2000 surged 8.5% – he said the current market has been the most speculative and momentum-driven on record. Rallies in everything from equities (including blank-cheque companies or SPACs), bonds and commodities like gold to bitcoin, he added, point to a market that’s long on confidence and short on rationality.
“This is a financial bubble of epic proportions and these are fun to trade, but bubbles get popped eventually and everyone seems to think they’ll get out in time,” he said.
