With the S&P 500 down over 20% in the first half of the year, and the housing market looking increasingly unstable due to rising prices, declining sales, and Federal interest rate hikes, investors are embracing two schools of thought. On one hand, some believe the market’s decline is a sign of larger trends to come, while others are taking the chance to buy dips at a discount.
Institutional minds seem more fearful of the market in recent months. So if not into stocks, where is the smart money going?
Wall Street Legend Shows his cards
Investment legend Michael Burry has made his move. The physician-turned-investor is famous for inspiring The Big Short with his bets against the housing market in 2008. This quarter, Burry has made a new prediction for the current equity market.
Last week, an SEC filing revealed Burry’s Scion Asset Management hedge fund has sold all 11 of its holdings in advance of a consumer debt crisis. “Net consumer credit balances are rising at record rates,” Burry tweeted. “Remember the savings glut problem? No more. COVID helicopter cash taught people to spend again, and it’s addictive. Winter coming.”
As of Q2, Scion’s only holding is the GEO Group, a company that owns and manages 106 prisons and “community corrections” facilities.
With considerably less confidence in the stock market, where else are gurus investing their money? Here are a few alternative strategies employed by the most successful minds in the business.
Inflation grabs the headlines
It's been more than 40 years since investors have had to contend with white-hot inflation levels. Consumers are feeling the burn as prices rise and their dollars do not go as far. For investors, money managers say an effective inflation hedge should act as a “store of value.”
One strategy that the “smart money” appears to be using to hedge inflation is investing in physical, or real, assets. Their thesis is that physical assets can offset inflation because their prices are ruled by supply and demand that is separate from financial markets.
History Repeats Itself
To identify potential hedges, investment managers are turning to history to see how some assets performed in prior inflationary periods.
In fact, Citibank recently reported that in the 1970s, when inflation last ravaged stocks, fine art produced average annual returns of 33%.
The report goes on to suggest that the economics of this $1.7 trillion market could be uniquely positioned for today's climate.
Supply is very low, because most high-value artists are deceased. But demand can remain high because great works of art are incredibly rare and culturally significant.
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Chaotic Markets in full gear
Hedge fund managers like Burry are tasked with returning a profit even in these volatile markets. Oftentimes, these funds diversify their portfolio with alternative investments that are less accessible to retail investors.
The prevailing belief is that alternatives can diversify a portfolio because they have differentiated risk and return characteristics from public markets. In other words, if the stock or bond market were to decline, alternative assets may not decline as much, or even increase.
Record inflation, major stock slides, and whispers of an imminent recession have left many investors reeling. Some are buckling up for a prolonged market downturn, while others eagerly await a potential bounceback. Meanwhile, hedge fund gurus like Ray Dalio are turning to alternative investments. Fund filings and investment reports reveal that commodities, gold, and fine art are three of these that are on the gurus’ minds.
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