Private asset owners enjoy relative calm as stock market swings

Financial advisors can add one more selling point to adding alternatives to client accounts: Avoiding whiplash when stock and bond markets swing madly.

It’s been quite a rollercoaster ride for owners of publicly traded securities since President Trump’s so-called “Liberation Day” last week. The S&P 500 plummeted almost 14 percent in the wake of his tariff announcement before rallying 10 percent on his reversal a week later and then falling another 4 percent only a day after.

Meanwhile, over in bond-land, the yield on the benchmark 10-year Treasury has enjoyed its own wild ride, whirling from 4.2 percent to 4 percent to 4.5 percent in the past week.

Seriously, it’s been so up-and-down lately for market-watchers that if there was a publicly traded chiropractor stock it would be soaring right now.

The neck vertebrae damage inflicted on owners of alternatives, often referred to as private market assets, however, has been far less. That’s primarily because most of these private investment vehicles are not marked-to-market, thereby eliminating the need to check prices by the day, hour or minute.

“You shouldn't check the price on your phone all the time regardless. And that's part of the issue, right? Psychologically, watching your portfolio drop like a stone is hard on the heart, right? So when you have a diversified portfolio that includes private markets, you're going to reduce the volatility in that portfolio,” said Eric Satz, CEO of alternatives provider Alto.

Added Satz: “Everybody knows you're supposed to sell high and buy low. And what we generally do is the opposite. And the thing about private markets is once you're in, you're in until you're not. You can't wake up and hurt yourself by pushing these little buttons on your phone that say sell.”

Alternatives started popping up in advisory client portfolios in earnest during the market rout of 2022. The S&P 500 sank by 19 percent that year while the Nasdaq Composite fell 33 percent, marking the worst year for these indexes since 2008. Simultaneously, the Morningstar U.S. Core Bond Index dropped 12.9 percent in 2022, for its biggest annual loss in all of its performance history starting in 1999.

Those two factors, along with Wall Street’s innate ability to crank out new and creative financial products, accelerated the adoption of alternative assets by financial advisors and their main street clients. No longer were private market assets solely reserved for the ultra-high-net-worth crowd. However, less liquid, they can now be found as permanent parts of retail investor portfolios.

The only questions remaining are: How big a part? And, which type of alternative?   

Depending on a client’s risk profile and growth objectives, Blair Cohen, head of private investments at GoalVest, recommends about 10 percent to 20 percent of client assets in alternative investments. Breaking the asset class down even further, he employs a mix of private credit, private real estate debt, private equity, venture growth and structured products to fill the alternative investments allocation.  

“We view this as a great buying opportunity and as the private markets generally move slower than public markets it is not too late. The rerating of multiples in the public markets should follow into the private markets and the tariffs – whether ultimately enacted or not – largely do not have a great effect on the underlying businesses in which we generally invest, especially in the venture growth space,” Cohen said.

Elsewhere, Jason Britton, founder and CIO of Reflection Asset Management, recommends between 5 percent and up to 30 percent in his asset mix for clients. And he is also using the current volatility to add to allocations.

“It's not too late to add to alternatives. We're adding to private equities - secondaries, not co-invest - asset backed private credit, and distressed private credit,” Britton said.

Moving on, Nathan Hoyt, CIO at Regent Peak Wealth Advisors, recommended a 20 percent to 30 percent alternatives allocation for those truly UHNW clients that can handle the illiquidity of private markets. As the public market continues to concentrate in a handful of companies, he believes private equity is simply a larger universe with more diversification opportunities.

“Publicly traded REITs bouncing around like stocks doesn’t accomplish the same goal of lower volatility as private REITs, and private credit is providing better income without a lot of the interest rate risk baked into publicly traded bonds,” Hoyt said.

Hoyt added that inflation sensitive investors should consider hard assets like gold or REITs, while speculative investors should consider venture capital or crypto. For income seekers, private credit is still providing attractive yields and should withstand any short-term uncertainty around tariffs or fed policy, according to Hoyt.

Finally, Eric Kirste, wealth manager at Savvy Advisors, said 100 percent of the UHNW clients he works with have allocation to private market alternatives. The exact percentage will vary based on their liquidity needs, the type of accounts the asset will be invested in, and their overall goals.

“It is not too late to add allocation to private markets. In a well-diversified account, you may have areas of opportunity that you can take assets from to fund the proceeds of alternative assets. Bear markets provide opportunities for rebalancing and reallocation into attractive markets,” Kirste said.