The Case for Alternative Investments

Welcome to Alternate Universe!

In today’s edition:

• WTH are alternatives?

• Job opportunities at recently funded European startups 👇

• The King of Collectibles is back!

The Crux 🔴

In the previous issue of Alternate Universe, I introduced the newsletter and its focus.

Today, we’ll dive deeper into the world of alternative investments. We’ll compare these to traditional investments, such as the good old 60/40 portfolio, discuss the benefits they offer, and explain why now is the perfect time to explore these opportunities.

Let’s dive in! 🤿

The 60/40 Portfolio

What is it?

The 60/40 investment approach is widely recognized for balancing risk and return. This strategy allocates 60% of your investment to stocks for growth opportunities and the remaining 40% to bonds for income generation and reduced volatility.

Introduced by Nobel laureates Harry Markowitz and William Sharpe through their work on Modern Portfolio Theory, the 60/40 strategy quickly became a benchmark for diversification.

One straightforward implementation of the 60/40 strategy is to invest in a mix of the Total US Stock Market and Total US Bond Market. ETFs like VTI and BND will do the trick for US-based investors.

So how has this strategy performed over the long term?

Pretty damn well.

A €10,000 investment made in 1985 would have grown at a compound annual growth rate of 7.28%, resulting in a total of €152,457 by 2023.

Not only has the 60/40 strategy provided spectacular returns, but it has also done so with lower risk. Over the same 38-year period, its Sharpe ratio was 0.71, compared to 0.51 for stocks and 0.48 for bonds.

What’s wrong?

Why are we even here debating the 60/40 when it’s doing what it says on the tin?

The 60/40 portfolio offers reliable returns with less risk compared to a stock-only portfolio.

However, the financial media has been sounding alarm bells for years, and the strategy's dismal performance in 2022—with a decline of 17.9% (its worst since 2008)—has only intensified these concerns.

Several factors contribute to the increasing warnings against the 60/40 strategy.

An inflationary environment tops the list, as higher inflation impacts both components of the 60/40 portfolio in different ways. Higher interest rates reduce companies' ability to borrow money and drive down bond prices. Furthermore, this simple strategy does not include other financial instruments that typically offer some inflation protection.

Critics argue that the remarkable returns seen in the 60/40 strategy can be attributed to the disinflationary period between 1981 and 2021. While this period certainly boosted returns, it’s important to note that the pre-1981 era also saw positive returns for the strategy.

Enter, The Alternatives

Institutional investors (like banks and pension funds) and high-net-worth individuals (HNWI) have been investing in alternatives for a long time. The largest categories include private equity, real estate, and commodities.

And their appetite for alternatives is growing.

In a survey conducted by Connection Capital, 40% of their HNWI clients are now allocating over 20% of their portfolio to alternatives.

Over the last decade, several new platforms have been established democratizing access to retail investors. Crowdcube and Republic helped give access to startup investments. Vinovest did the same for wine and Mintos for P2P lending.

Crypto is an interesting example where the opposite happened.

While it has long been an investment option for most retail investors, institutional access to the asset class largely materialized over the past year. The Bitcoin ETF has seen a stellar rise in assets under management.

Alternatives are known for their potential to enhance portfolio diversification, as they often move independently of traditional asset classes like stocks and bonds. This can help in reducing overall portfolio volatility, whilst improving returns.

Alternative assets come with downsides too.

The elephant in the room is liquidity. Investments in private equity and startups typically involve longer timelines and lockup periods, which stands in stark contrast to the readily accessible funds in a 60/40 ETF split.

Additionally, the inherent complexity of these investments necessitates expertise, which often comes with higher fees compared to passive investments.

The argument here is not to encourage you to invest all your hard-earned cash into shiny alternative investments. I think that most people should follow a barbell strategy, allocating 80-90% of their investment funds to a simplified core portfolio, such as a 60/40 split.

The remaining 10-20% can be dedicated to a satellite portfolio, which offers higher risk and potentially higher returns — what I like to call a fun money portfolio.

In this newsletter, we’ll dive into some exciting investment opportunities for your fun money portfolio. Get ready to discover new ways to diversify and add a little spice to your investment game beyond the traditional 60/40 approach.

Join me next week, as we’ll dive into a growing trend…🍷🍸

Dig Deeper ⛏️

• What are alternative assets?

• Alternatives in 2024 - JP Morgan

👋👋 P.S. If you’ve enjoyed this week’s issue refer to a friend. If you’re that smart friend, subscribe here.

Headhunted 🦅

Recently funded private companies need talent! Scout jobs at recently funded European startups, ahead of your competition. 💪

1. Cusp AI 🇬🇧 - Search engine for materials has just raised a $30m seed round. No formal jobs are listed but the company is receiving a lot of inbound CVs. (link)

2. QBlox 🇳🇱 - Dutch provider of scalable and modular quantum control stacks raised a $26m Series A. Hiring multiple positions (link)

3. Tandem Health 🇸🇪 - raised a $9.5m seed round to grow its clinician co-pilot software. Hiring software engineers among other roles (link).

4. C12 🇫🇷 - A spinoff from the École Normale Supérieure in Paris has announced an €18m funding round to develop a universal nanocomputer. Multiple roles open (link)

5. Atmio 🇩🇪 - announced €5.1m seed round. The company aims to fix methane emissions reporting in the oil & gas industry. Hiring a marketing manager (link).

6. Fossa Systems 🇪🇸 - IoT and space tech startup raises €6.3m. Multiple roles in Spain and Portugal (link).

Interestingness📔 

• NVIDIA’s rollercoaster ride as the most valuable company in the world (link)

• How private equity ate Britain - A more sombre look at the effects of private acquisitions (link)

• The King of Collectibles is back! Season 2 of Goldin Touch is now on Netflix (link)

• Politicians are at it again - Michael Collins discloses the purchase of ‘Velodrome’, a crypto coin with a market cap of $150M (link)

• Bootstrapped SaaS companies reach $500k ARR as fast as VC-funded peers 😱 (link)

📚 New to investing? Grab a PDF copy of my ebook here.

As always, the financial disclaimer!

This is not investment advice. I am not a financial advisor. Make sure to conduct your thorough research before purchasing or selling financial products.