Market volatility

How Alternative Investments Can Help Hedge Against Today’s Market Volatility

Market volatility


The public markets have been particularly volatile over the last few months. Several recent events and factors can explain this rise in market volatility.

Glut in Oil Supply: The price of oil has decreased over the last six months from over $100 a barrel to under $50.  The NTMEX Crude Oil index as of March 30, 2015  is at $48.39 a barrel. The glut of supply has much to do with increased production stemming from the boom of North American shale.  Additionally, as supply has increased, OPEC continues producing oil at the same rate, raising supply levels to record highs and pushing prices down significantly.  Prices in oil affect markets globally.  For example, while a decrease in gas prices puts more cash in consumers’ pockets, the decrease in oil profits pushes down wages and depresses employment within this sector.  Markets speculate on these price moves, causing volatile market movements.

Currency Instability: The Swiss unexpectedly decided to discontinue pegging the Franc against the Euro, causing increased currency price swings. The Euro and US dollar are almost in parity for the first time in over 8 years.  Businesses are paring down Euro exposure and this moving of capital has created sharp price swings and volatility.

Stimulus in Europe: Similar to the U.S. stimulus package after the financial crisis, Europe is implementing quantitative easing measures to attempt to stimulate the Euro zone.  Investors see this as a sign of European economic weakness, particularly questioning Italy and Greece and their ability to pay its debt.

Potential Interest Rate Increase in the US: Investors are watching everything the Federal Reserve says and does as an increase in interest rates is expected to go into effect in the next few months.  As the cost of borrowing goes up from almost zero since the financial crises, market dynamics will start to change resulting in increased volatility. By increasing the cost of borrowing, the federal government is attempting to lower the money supply.  This has an effect on consumers as banks will increase interest rates on mortgages and credit cards, limiting disposable income and decreasing business revenues and profits.  This effect on businesses will then ripple through the markets.

By investing with a long-time horizon, short-term volatility can be hedged. Investing in alternative assets, which are inherently illiquid, can be a great way to hedge against this increased volatility. For example, investing in real assets like rare coins, wine, and real estate perform differently from traditional stocks and bonds as they exhibit less correlation to market dynamics. Investing in venture capital or private equity can perform consistently well in all market environments. With an increase in interest rates on the horizon as well as potentially volatile macro-events brewing, the stock market will tend to be viewed as less attractive.  Investors will look for non-correlated assets in times of stock market volatility and many are seeking to allocate to alternatives.


SEE RELATED: 3 Benefits of Long-Term Investing in Alternative Investments


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