April 10, 2021 • 3 min read • Real Estate

 

In an investors portfolio, inflation can be one of the greatest hidden threats to real returns. It is no wonder alternative investments have garnered the attention they have amidst the United States’ current economic climate. In these times of rising inflation, many investors have pivoted to alternatives in search of security and stability for their investments. 

It is important for alternative investors to know how they can protect their portfolios from the risks associated with increasing prices on goods and services. While there are many strategies that can be used, we will focus here on two main concepts: hedging and diversification. Understanding these approaches to risk management allows investors to make more informed choices about their portfolio allocations and help reduce their exposure to risk. Income-producing real estate appeals to investors for its relatively stable source of return in a portfolio, as real estate tends to appreciate in step with inflation. Higher inflation results in higher operating expenses, resulting in higher rent prices. Multifamily real estate and commercial properties with annual rent increases can help combat the effects of higher inflation. Currently, high-quality private commercial property yields are exceeding those of high-quality bonds while providing a larger potential income cushion while offsetting the impact of inflation.

Diversifying into alternative asset classes can also help protect your investments against losses caused by inflation. While more traditional asset classes (i.e. growth stocks) tend to underperform the public markets, tangible assets such as real estate tend to outperform the markets during times of inflation. Value stocks, however, tend to outperform growth stocks in inflationary periods due to increased investor appetite for dividend payments (also to help outpace inflation). A combined approach between alternative assets and stocks can help to both diversify and hedge your portfolio against inflation. 

On that note, hedging is another benefit found in alternative assets that help combat inflation. Tangible assets, such as real estate and gold, are well-known inflation hedges. If the dollar value decreases as a result of inflation, the cost of gold typically increases as gold becomes cheaper in other currencies. Inflation hedging typically involves investing in an asset that is expected to maintain or increase its value over a specified period of time. 

Due to historically low-interest rates, investors are continuing to pivot to alternative investments. Adding alternatives to a portfolio has historically helped reduce volatility due to the illiquid nature of alternatives, while simultaneously enhancing returns. Investors should be cautious and selective with private fund managers, as not all managers undergo the same due diligence. To learn more about Yieldwink’s due diligence, check out the due diligence page here.

 

Learn more about Yieldwink’s Due Diligence.

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