Trends Watch: Alternative Investments Diversification

EisnerAmper’s Trends Watch is a weekly entry to our Alternative Investments Intelligence blog, featuring the views and insights of executives from alternative investment firms. If you’re interested in being featured, please contact Elana Margulies-Snyderman.  

This week, Elana talks with James Haddaway, Chief Investment Officer & Managing Partner, Satori Capital.

What is your outlook for alternative investments?

Subject to partnering with the right investment managers, I’m very positive on the prospects for alternative investments. With the majority of passive investment vehicles for U.S. equities, like the S&P 500 and the Nasdaq, now trading at historically high valuations, it’s a great time to diversify into alternatives.

Where do you see the greatest opportunities and why?

In our Satori XL Partnership Program, in which we form strategic partnerships with talented emerging investment managers, we have some fantastic managers that represent areas of great opportunity for liquid investments. For instance, Pavise Capital Management, an equity long/short fund, has outperformed the S&P 500 for the last nine years—and they’re doing it with 25% less exposure, zero FAANG exposure, and none of the extremely expensive tech and high-growth stocks. They’re tilted toward value stocks, which is a way to stay in equities, preserve the S&P 500 upside, and avoid the overvalued sectors of the market. Crawford Lake Capital Management is another equity long/short fund that has been able to generate uncorrelated returns with its opportunistic trading strategy.

While perhaps a contrarian view, I also think there is significant value in commercial mortgage-backed securities. I believe that the real estate market has not finished its post-pandemic comeback, particularly in office and hotel properties. Another XL Partner, Cicero Capital Partners, has done a great job finding stable and well-collateralized positions that can potentially generate above-average returns with lower risk.  

As for non-liquid investments, we’re seeing a number of interesting, idiosyncratic, uncorrelated opportunities involving private assets that have very compelling risk/reward profiles. I think those are a great way to invest right now. Of course, we have our own private equity investments at Satori, and we have a number of co-investments in private companies through various partnerships. We have recently been able to invest in SpaceX, the aerospace innovator, thanks to our network and relationships, and we just completed a co-investment in a really impressive alternative protein company called Mission Barns.  We’re also involved in an upcoming hotel transaction with one of our real estate partners that we think will be quite significant. Private investments will be a major focus for us going forward, and we have created a co-investment program to scalably pursue these opportunities. It has attracted a lot of interest from investors, particularly because they can commit to future investments without any fees until we enter an investment.

Overall, we’re keeping an eye on the potential for a more inflationary environment as the economy recovers post-COVID-19. Tilting your portfolio to do well in that kind of environment is a wise move, and we are considering launching a product for our investors that would combine ETFs and private investments that could perform well if inflation increases.

Where do you see the greatest challenges and why?

There are going to be market challenges, and investors should know that it’s a good time to rebalance their U.S. equity passive exposure and get more diversified. If investors really understood the correlations between their various investments, many investors would be surprised by their lack of portfolio diversification. Investors should be looking at alternatives, non-U.S. developed markets, emerging markets, commodities like precious metals, and small-cap equities. Essentially, if you take all the sectors that haven’t done well during the last decade, it’s likely a good time to rebalance into those areas now, and I don’t think enough investors are doing that. We are already seeing signs of a cyclical turn in a lot of those areas, and they’ll do even better as the economy recovers post-pandemic.

What keeps you up at night?

Like everyone else, I’m ready for the pandemic to be over, and I worry about a really contagious and deadly variant that would require a total revamp of the vaccines we have now. It would truly be awful now that we’re finally pulling out of the pandemic to have everything set back by another six or 12 months. And, like a lot of investors, I’m concerned about a scenario where we really lose control of interest rates in the U.S., the U.S. dollar sells off severely, and we see much higher inflation numbers. We have become so used to 40 years of deflation and lower interest rates, but that could definitely turn around on us. It’s probably a relatively low-percentage risk, but it exists, and it’s one of the reasons we may introduce the inflation-tilt portfolio product I mentioned above. Particularly after the surprises of 2020, we want to be ready for what might come next.

The views and opinions expressed above are of the interviewee only, and do not/are not intended to reflect the views of EisnerAmper.