The rules of the game in tradable markets are changing – and this is the point in time for creative investment solutions

Continued stock market tide, the longest streak of gains in history, shattering peak levels and optimal macroeconomic conditions, led by a zero interest rate environment, have provided investors with an opportunity to generate adequate returns over the past few years. But now a sequence of financial risks signals the possibility of changing the rules of the game in the tradable markets. Against the background of developments and growing sensitivity, the spotlight is turned to alternative channels, as investment solutions that embody balancing and protection mechanisms against volatile market fluctuations, alongside the ability to yield excess returns even in a challenging economic reality.

All the economic engines have operated in perfect synergy in pushing stock markets in recent years to new heights. Leading banks around the world, led by the Fed, have adopted ultra-expansionary policies that have resulted in massive purchases in the tradable debt market (bonds), unstoppable money printing, abnormal liquidity flows and a zero-level interest rate fixation. Investors’ appetite for increasing exposure to risky assets, mainly through equities.

Vitaly Plotinsky (Photo: Micha Brickman)

However, the risks that have been piling up recently, in parallel with the change in direction in central bank policy, are expected to signal the end of a long economic cycle and the disappearance of ideal market conditions – a move that could devour the cards and redefine the markets. Amidst the load of events, most of the attention is drawn to half-inflation in the world when the equation and risk are clear – as inflation climbs above the target limit, the potential for interest rate hikes, the biggest threat to markets, increases accordingly.

At this point the Fed is on standby to examine whether this is transient (temporary) inflation, resulting from disruptions in global supply chains and subdued demand erupting in the face of the plague, or whether inflationary head-raising will accompany us for a long time to come. If the latter scenario turns out to be true, meaning that the inflationary tide will not subside soon, then there will also be no escape from the required step – raising interest rates to curb inflation. This effect is expected to provide the opening shot for stock market shocks, which are largely sensitive to any sign of a change in the interest rate environment.

It is worth noting that in November inflation in the US climbed to 6.8%, the highest rate recorded in four decades. Of liquidity in the markets through a gradual reduction in the volume of bond purchases. This is in fact another blow to the tradable debt market, which has already suffered significant erosion in yields in the face of the zero interest rate effect. On this point, in relation to the zero interest rate, it is worth dwelling.

Take advantage of the interest rate environment for loans and leverage
Zero interest plays into the hands of sophisticated investors in the ability to take out cheap interest-bearing loans and leverage the money wisely. For example, savers in a savings policy or provident fund can consider taking out a loan from the governing body for most of the money they have accumulated, at low interest rates that usually reach the prime minus minus half, ie an annual interest rate of just over 1%. The money can be invested in the various investment channels, which embody a potential return that exceeds the annual debt repayment interest several times over.

To illustrate, use a simple theoretical example of smart financial leverage. For those who want to purchase a real estate property for about NIS 2 million and have a higher liquid amount, can invest NIS 3 million in a provident fund, take a loan on attractive terms in the amount of the purchase of the property, pay an annual interest of about 1% on the debt , And actually produce two income-producing investment channels – a provident fund and a real estate property.

This strategy also largely depends on the investment range. The longer the investment duration, the lower the risk curve. When talking about an investment designed for a decade or more, the level of risk decreases dramatically and even kisses zero. Based on historical data, the financial markets tend to rise and yield over time and this means that even crisis events and times of acute volatility, which are likely to emerge during the period, will have only a temporary effect, as in the longer period the markets are expected to repair and continue north.

And from here back to the point from which we stopped. The accumulating signs in the markets are signaling that the current situation in the two main investment arenas, equities and bonds, is complex and challenging, especially when price levels are hovering around an all-time high, an element that could lead to a sharp and aggressive correction if concerns materialize.

The explosive situation has recently led many investors to reduce their exposure to the tradable market and divert the money path to alternative investment channels, led by alternative investments. These have become synonymous with risk diversification, diversity in the investment portfolio and the neutralization of the effect of volatility on the stock exchanges, along with the potential for bearing excess returns.

Contribution of the alternative component in the investment portfolio
It is hard to miss the growing interest in recent years around the concept of “alternative investments” and the acceleration they have gained after years that have been deep under the radar. In fact, these are off-exchange investment channels, ie non-marketable investments, which are characterized by a very low correlation to market fluctuations, and hence bear the oil – an alternative to traditional investment assets in the tradable market.
Alternative investment channels for qualified investors are classified ((Accredited Investor, When the scale of possibilities is huge and includes, among other things, investment in private equity funds (ONReal estate projects and commodities, commodities, infrastructure and energy projects, hedge funds (Hedge Funds), Social loans in the model P2P And the list goes on. These investments produce, in addition to an attractive return potential, also a defense mechanism against times of acute volatility in the markets.

An interesting option that is also accessible to investors who do not meet the conditions of defining a ‘qualified investor’, is made possible through Fund To Fund, I.e. bundled funds under one fund. This creates an option for investing in one fund, at a relatively low investment threshold, when it holds and manages several funds under it, sometimes in different segments. Thus the investor gains a built-in risk diversification and a wide diversification of the portfolio in a single investment instrument.

A market that is expected to soar to a value of about $ 17 trillion
Preqin, One of the largest research companies in the world, recently published a forecast for the alternative investment industry. It estimates that exposure to alternative assets will grow in the coming years consistently and at an impressive rate of almost 10% annually, with the volume of investments in the field expected to rise accordingly to about $ 17 trillion by 2025.

From the forecast she publishedpercentage and The viewer has a growth rate of almost 10% in the volume of alternative investments every year (until 2025)

At this point one can also mention Yale University (Yale) And the investment policy it has adopted, and is receiving worldwide attention. As of last year, Yale is ranked as the third richest educational institution in the United States (with an investment portfolio of over $ 30 billion) and the mix of investments it unveiled last year increased the volume of investment in alternative assets to 70% of the portfolio. Non-negotiable yields excess return over time.

Bottom lineThe risks that pile up in the markets require every investor to think about creative investment solutions, including the integration of alternative components, which produce a foundation of stability in the investment portfolio and the ability to yield a return even in the face of disturbing the economic balance. At Net Family Office, we have established a professional system that specializes in the alternative worlds and offers the public of qualified and capital-rich investors a wide and high-quality range of non-marketable investment assets, managed by first-rate investment managers in Israel and overseas.

The author of the article is Vitaly Plotinsky, Partner, VP of Marketing and Financial Planner cfp In a group ‘Net Financial Planning’ And in the Net Family Office



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