The first half of 2023 has brought a spike in market volatility that has created a challenging macro environment for many portfolio managers, dealmakers and advisors. Market participants are undoubtedly experiencing the impact of market uncertainty amid still uncomfortably high inflation, an environment of elevated borrowing costs and an underwhelming economy.

At our inaugural Connect Money conference, Alternative Assets Fundraising: Steering Through Rough Terrain, in Chicago, we asked our panelists, including Michael Underhill, Capital Innovations Founder, CEO and CIO and ADISA President; Kevin Malone, Greenrock Research Founder & President; and Mike Hurley, Nexpoint Advisors, L.P. Chief Market Strategist, among others, to share their thoughts about the current investment landscape.

The panelists discussed the possibility of a liquidity crunch as fundraising and dealmaking has slowed given the Federal Reserve’s most aggressive tightening campaign since the inflation shock of the 1970s, the failure of Silicon Valley Bank and Signature Bank, and overall jitteriness in the financial system.

Despite these lingering concerns, the role of alternative assets in a portfolio is becoming more important than ever, as many are uniquely poised to take advantage of significant global trends.

“We’re seeing a whole host of opportunities for both institutional investors as well as the mass-affluent in the private wealth channel. Institutional investors are slowing the rates of commitment in private equity, yet they’re increasing their commitments to private credit. We’re also seeing an increase in the amount of infrastructure investments to complement their real estate investments,” said Underhill.

Throughout the discussion, our panelists also touched on obstacles to “traditional” 60/40 portfolios, highlighting the potential benefits of less conventional return-enhancing asset classes like alternative assets, and how conversations are turning from the case for investing in alternatives to how to invest in alternatives.

“Our expected returns for stocks and bonds are very small. Our expected return over the next decade is that people are going to have a hard time getting even 2% or 3% by traditionally investing in a 60/40 portfolio. What that’s going to mean is, yes you can use illiquid investments,” noted Malone.

Most panelists concurred that real estate is still an attractive investment even as values reset in response to changing tenant demand, higher financing costs and pending debt maturities, which is leading to disparate returns among regions, sectors and property types.

“I think the alternative assets space is more important today than perhaps it’s ever been because in the liquid space the expected returns are so low. We love cashflow and we see several types of illiquid investments that offer current cashflow in the 5%, 6%, 7%, 8% level and the chance for higher rates of return. Most of them fall somewhere in the vicinity of real estate, but not all of them,” added Malone.

“I think real estate is still in pretty good shape from a cyclical point of view, and alternative income sources are very important to find,” said Hurley. At Nexpoint, we have a merger arbitrage fund that generates income by using stocks that are involved in mergers so you can really get income without taking fixed income risk.”

Hurley also noted that the biggest challenge for market participants is to be bullish. “There are a lot of reasons to be negative on the economy and the stock market. You have an inverted yield curve and geopolitical instability. But if you look at the markets, they’re behaving pretty well. For the short- and intermediate-term at least, the challenge is being bullish.”