What is an inflation hedge?

Key takeaways

  • Consumer fears surrounding inflation are at a record high, according to a New York Fed Survey, as the average price of goods and services has risen 8.5% in the past year, the highest increase on record since 1981.

  • While it is important to hold liquid assets that can help protect against short-term loss of income, an excess of cash in an investor portfolio can help limit upside potential that can be generated by more long-term, less liquid opportunities.

  • By increasing the share of some private assets that can act as inflation hedges, investors can potentially create a diversified investment portfolio that can help offset inflation.
Man shopping in a supermarket while on a budget. He is looking for low prices due to inflation, standing looking at his phone in front of a row of freezers. He is living in the North East of England.

In late 2021, billionaire hedge fund manager Ray Dalio made headlines when he told CNBC that “cash is trash,” and warned investors against letting their money sit idly in a traditional bank account.

Dalio’s statement was provocative but factually right. Cash – and other liquid assets – can be crucial in helping to limit short-term losses of earnings and to weather unpredictable life events. But money kept in cash can mean the loss of investment opportunities and carries the risk of devaluation – the loss of value over time due to inflation. 

Inflation is a concept most people are familiar with – in fact, millions of Americans are experiencing it at this very moment. In March 2022, the consumer price index (CPI) had risen at an annual rate of 8.5%, the highest increase on record since 1981. And whether or not consumers understand how inflation works, they are likely to feel its impact at the grocery store and at the gas pump. According to a recent survey by the New York Federal Reserve, they are becoming more fearful of it as a result, a potential self-fulfilling prophecy as consumer expectation of further inflation alone can lead to an increase in prices.

When inflation increases significantly, investors tend to flock to asset classes that better shield them against price increases by offering higher real returns. Aside from buying TIPS – which are Treasury-issued securities with coupons that are indexed to the inflation rate – investors usually tend to buy real estate or gold. Public equities are usually also a good inflation hedge as earnings – the fundamental driver of equity prices – also tend to increase with inflation.  More recently, Bitcoin has recognized as a good inflation hedge – there is a 0.6 correlation between BTC moves and inflation moves.  

Diversification can help 

Alternative investments have historically been identified with higher risk, mainly due to their low liquidity profile. But liquidity can be less of a priority in times of high inflation, as investors look for assets that appreciate at least as much as the inflation rate. Even if you’re not an economist, you are able to grasp the significance of this by observing the increased demand for consumer goods that happens when people perceive a period of high inflation is about to begin. 

In 2014, as the Russian ruble lost 50% of its value following Western sanctions amidst the annexation of Crimea, and a fall in oil prices, Russian citizens raced to buy physical goods – TVs, washing machines, computers – which they believed to be – correctly – a better store of value than their cash. 

And while Yieldstreet doesn’t sell TVs or laptops, it does offer some potential inflation hedges as single investment opportunities, as well as in a diversified fund. Indeed, alternative assets such as real estate, art and crypto may help protect against rising prices.

Learn more about the ways Yieldstreet can help diversify and grow your portfolio.

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