Top Alternative Investments Trends for 2021

1. Reconsider the 60/40 Portfolio

Historically, investors have relied on typical portfolio allocations of 60% in equities and 40% in bonds, in the effort to balance their portfolios between growth and protection. Looking forward, the traditional 60/40 may no longer provide the benefits of the past. Equity markets are trading at, or near, some of their highest valuations and have become increasingly more volatile with large sudden swings. This is all while the 10-year United States Treasury rate is at, or near, its lowest rate; becoming increasingly more correlated to equities than ever before, suggesting its benefit of being a counterbalance to equity risk may be diminishing.

This is where alternatives come into play, which offer returns typically uncorrelated to equities and bonds and can help mitigate risk in portfolios. In addition, private markets such as private debt and equity may offer attractive returns in excess of public markets, due to their ability to provide excess returns from the limited liquidity they offer.

2. Healthy Consumer Sentiment

Despite the stressors resulting from the pandemic, consumers appear to be in a relatively stable to strong position. Consumer delinquencies and defaults have come in lower than expected in 2020 and surprisingly lower quality consumer borrowers have been servicing their debts while performing in-line with higher quality consumer borrowers. A large driver of this was the reduction in discretionary spending alternatives, such as travel, dining out, sporting events, and other outside-the-home entertainment options. With COVID-19 likely to continue to reduce the amount of discretionary spending by consumers until the spring and assuming a positive distribution effort for vaccines, consumers may continue to prioritize debt servicing and reduction payments.

Though details are uncertain, additional fiscal stimulus remains on the horizon. Depending on the final legislation, a restart of the federal unemployment insurance program along with any direct payments to individuals, would further benefit consumers.

3. A Travel Comeback Spurring Commercial Real Estate

We believe hotels will return in full force, or at least those in attractive locations that have maintained a level of quality. The market will be bifurcated between winners and losers with those in less desirable locations and those with sub-standard quality to likely be challenged as demand is no longer expected to outstrip supply, as it did to support lower end hotels prior to the pandemic.

The central tenets to travel remain intact despite a hiatus. We anticipate that the desire to travel and the demand for vacations will likely bounce back, as well as an increase in business travel.

4. A New Generation of Art Buyers

Though the number of lots sold and total sales decreased during the first seven months of the year, the art market showed impressive resiliency in 2020 with the SMM All Art Index posting a 1.6% increase between 2019 and 2020—supported by a 2.3% increase in the number of bidders per auction. Interestingly, the underlying drivers of the increase in bidders and average fair market values tells a story of how the demographics and technology of the art market are rapidly evolving.

The first driver of change is the increase in bidders from the millennial generation, which jumped over 22% from 2019 to 2020. Millennials in the United States represent the largest generational cohort. Their continued interest in the art market will likely continue to propel the market even higher. The second driver of change is the move to online bidding, which saw sales totalling over $400M during the first half of 2020 (a quadrupling of online sales were generated during the first half of 2019 that achieved a mer $91M in sales). While much of the shift to online sales was due to the restrictions on public gatherings due to COVID-19, it’s likely that the adoption of this new medium will continue to take hold and drive further growth in bidders.

5. A Continued Surge In Legal Finance

The asset class of Legal Finance has rapidly grown over the past few decades.With the aftermath and lasting effects of COVID-19, the legal industry, coupled with legal finance firms, are expecting a substantial increase in litigation, ranging from insurance policy rescissions to contract disputes. Though still in its infancy, and developing, as an alternative asset class, Legal Finance can help level the playing field for plaintiffs and defendants, something that we anticipate will be greatly needed over the next few years, as the world recovers from the pandemic.

6. A Push Towards Decarbonization

There’s a global push to reduce carbon emissions across various transportation networks, fueling conflict between market operators and multinational regulatory bodies. Specific to the shipping industry, this is the most significant driver of change. Part of the United Nations, the International Maritime Organization (IMO) is pushing to reduce shipping emissions by 50% by 2050. With new carbon reduction regulations expected to come in force by early 2023, shipowners are racing to improve the fuel efficiency of existing vessels, with new vessels powered by liquid natural gas (LNG). Additional alternatives energy sources are being considered as well, but the IMO will need to provide a better framework, as well as research and development support prior to enforcing emission regulations.

7. Pockets of Concern in Retail Commercial Real Estate

The pandemic has accelerated the adoption of online shopping by roughly five years over the past six months. Though the adoption of e-commerce among younger generations, specifically in urban areas, has been a long standing trend, the adoption acceleration for older cohorts is rapidly increasing. With this, the question becomes whether or not recent adopters will go back to in-person shopping when the opportunity allows.

We anticipate that the return to previously-seen levels of in-person shopping, if ever, will take time. We expect grocery stores and the service sector (such as beauty services, restaurants and bars) to recover more quickly, but fear that the overall prognosis is negative for retail commercial real estate and will likely result in a wave of store closings over the next few years.

8. The Institutionalization of Single-Family Rentals

Institutional investors have long found successes in owning traditional multi-family home rentals. These same investors, however, have been slower to adopt a strategy for single-family rentals. This resulted in a decade-long process of institutionalizing the single-family rental market yielding only a net penetration of low single digits for institutional investors.

We expect this to change over the coming years as private owners begin to sell their rental properties to professionally-managed companies and investors who can employ operational efficiency and will have access to low cost financing. Assuming the work-from-home trend at least partially continues, meaning less than 100% of workers who previously went into the office full time no longer will, the attractiveness of single-family rentals is likely to increase.

9. Continued Stress on Corporate Balance Sheets

Leveraged loans—bank syndicated loans that rank higher than bonds in a large corporation’s capital structure—are likely to see pockets of stress as corporations continue to default on their debt obligations. Through November of 2020, the year-to-date default rate for leveraged loans stood at 4.3%^a, well above the rate of the past few years. Fitch, a rating agency, forecasts the overall default rate to reach a three-year cumulative rate of ~17% by the end of 2022. If met, this would eclipse the 15% three-year high following the Global Financial Crisis.

With defaults and downgrades likely to continue in the corporate sector over the coming years, opportunities are likely to arise as structural dislocations continue to appear. In order to generate liquidity and/or comply with certain investment or structural restrictions, certain investors and packaged investment products may be forced to sell positions at less than ideal prices.

10. Large Players Coming Down Market

Many large hedge funds and private equity firms were slow to raise new opportunistic funds to take advantage of the dislocations created by the Global Financial Crisis. To avoid this from repeating, firms have been quicker to launch and raise funds for new opportunistic investment strategies at the onset of the pandemic. These large capital raises, however, have been met with fewer opportunities in the markets given the swift and decisive action on the monetary and fiscal policy fronts. The result is excess dry powder than many of these firms have opportunities for. These large firms have consequently started to deploy capital to smaller performing businesses.

This had multiple effects on the market. The first, is that borrowers are seeing financing available for lower yields given the imbalance of cash available to borrow and the competitive lending landscape. The second, is that smaller lenders are now able to partner with the larger firms to seek larger opportunities than they were previously able—the pairing being mutually beneficial—as the large firms can rely on the smaller firms’ due diligence capabilities, while the smaller firms benefit from the additional balance sheet provided by the larger firms.