Market Matters

Market insights from the portfolio management team at Seven Hills Capital Corp.

Market Matters – November 28, 2024

Investing in Alternatives – Positioning Portfolios for the Future

The past few weeks have delivered an extraordinary rally in capital markets, fueled by post-election optimism and a remarkable surge in Bitcoin. While these sharp price moves capture attention, they serve as a reminder of the importance of discipline and strategy in managing portfolios. At Seven Hills , we recently trimmed our Bitcoin and equity weights, reflecting our measured approach amid heightened market exuberance.

For many investors, the challenge lies in relying solely on the traditional “long-only” approach to stocks and bonds. While effective in certain market conditions, this strategy can feel limiting during periods of uncertainty or volatility. In this edition of Market Matters, we explore the growing role of alternative investments in portfolio construction and why now is an opportune time to consider their potential benefits.

A Timely Reminder

As Taylor Swift recently reminded us during her unforgettable performances here in Toronto, “These walls that they put up to hold us back will fall down.” This lyric from her song Change speaks to resilience and breaking through limitations—whether in life or in investing. For many, alternative investments offer a way to break free from the constraints of traditional asset classes, opening the door to greater diversification and opportunity.

Understanding Alternatives

Alternative investments encompass a diverse range of assets, including private equity, private credit, hedge funds, liquid alternatives, real estate, commodities like gold, and non-traditional assets such as cryptocurrency. These investments can offer three key advantages:

1. Diversification: By reducing reliance on traditional equities and bonds, alternatives help smooth portfolio performance across market cycles.

2. Inflation Hedging: Commodities like gold have historically acted as a hedge against rising inflation and currency devaluation.

3. Lower Correlation: Many alternatives exhibit price movements that are less tied to traditional markets, which can mitigate overall portfolio risk.

While alternatives come with trade-offs—such as reduced liquidity and higher fees—their growing popularity is hard to ignore. The alternative investment market surpassed $13 trillion by the end of 2023, driven by institutional investors like pension funds and endowments seeking to achieve their long-term goals. Furthermore, innovations like liquid alternative ETFs and mutual funds have made these strategies more accessible to individual investors.

Our Approach

At Seven Hills, we have long recognized the value of alternative investments. Currently, our portfolios include liquid alternatives, gold, and Bitcoin. We are also conducting due diligence on managers in private credit, private equity, and select specialty absolute strategies, such as music royalty funds, which exhibit very low correlations to stocks and bonds.

Contrarian thinking is a consistent part of our analysis because we believe in examining facts from as many perspectives as possible.There are times when this approach highlights opportunities with a particularly high probability of success. We believe we are in one of those moments now. With sentiment overwhelmingly optimistic and many expecting markets to soar next year, it’s crucial to approach the current environment with caution and critical thinking. By integrating alternatives into our portfolios, we aim to preserve capital, reduce risk, and maintain the flexibility needed to navigate uncertain market conditions.

Being Prepared

At Seven Hills, we are committed to helping our clients navigate today’s complex markets with confidence. By incorporating alternative investments into portfolios, we aim to mitigate risks, capitalize on unique opportunities, and ensure alignment with your financial goals.

This is also a time for reflection and gratitude. To our American clients and readers, we extend our warmest wishes for a Happy Thanksgiving. May this holiday bring joy, connection, and peace as you celebrate with loved ones.

Now is an ideal time to review your asset allocation to ensure it is positioned appropriately for current and future market conditions. We are often called upon to review the portfolios of clients referred by lawyers and accountants, and we welcome the opportunity to assist you. If you would like a complimentary portfolio review, please contact us, and we will be in touch.

We help our clients navigate complex financial landscapes, ensuring their success and peace of mind.