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What’s your cutoff date for wishing people a Happy New Year?
I think it’s February 1st. If it’s still January and you have not spoken to the person yet, it’s perfectly acceptable.
So, Happy New Year!
Are you like me and tired of reading everyone’s 2024 market predictions? 🙂
What about all the articles that come out at the end of every year telling you how it will be critical for you to increase your clients’ allocation to alternative investments over the coming year without knowing you or your clients’ situation at all?
Well, I’m not one to make predictions. And in general, I believe in thoughtful portfolio construction—including appropriately sized allocations to alternative investments tailored to a client’s specific risk profile and targeted to help them meet their investment objectives.
Rather than predictions and unsolicited advice, I thought I’d kick off the new year by making you a few promises instead:
— We will exclusively assess individual managers & strategies that are in the best interest of investors and—cliché incoming—always be on the same side of the table as them.
— We will only recommend portfolios that jibe with investor asset allocations and their goals-based planning—and we will not pitch the ‘hot trade.’
— We will be completely transparent with what we do, how we do it, and what the fees to investors are.
— We will never participate in ‘pay-to-play’ or fee-sharing arrangements with individual managers & strategies—we allocate to them because we believe they are great at what they do. Full stop.
Looking back at the list, it’s nothing new. This is how we always operate.
Best,
Dan
Alternative Talking Points
We review the latest monthly reports and industry analyses across the private markets, boiling them down into a few easily digestible points to share with your clients. Contact us if you’d like more depth.
Hedge Funds: Strong close to 2023 and slowing withdrawals with expectations of increased volatility in equities and fixed income markets in 2024.
➕ HFRI Fund Weighted Composite Index increased by approximately 2.6% in December, culminating in a 7.5% return for the year 2023.
➕ Equity and credit strategies were particularly strong strategies going into the end of the year, driven by declining inflation, falling bond yields, and general optimism about an economic recovery and hoped-for soft landing.
➕ Discretionary global macro strategies saw overall positive results but with wide dispersion across managers. Successful strategies were often long on bonds in the US, UK, and Eurozone and long on global equities.
➕ Both the FX sector and the commodities market were challenging areas for most strategies. In FX, particularly short positions on the Japanese Yen against the USD were difficult, while commodities saw mixed results, with energies being notably challenging.
➕ Quantitative macro strategies showed mixed performance, with many programs slightly negative. However, those that were positive tended to be long equities and bonds and managed to minimize losses in FX and commodities.
➕ Commodity specialists focusing on agricultural markets, particularly in grains and livestock, generally saw positive performance. Most successful strategies involved short positions in corn and soybeans and successful trades in soft commodities.
Private Equity: Continued slowing from 2022 highs with a reduction in deals, fundraising, and exits, and a record $2.5T in dry powder.
➕ Tightening credit from banks continues, slowing M&A activity, fundraising, exits, and restructurings, with PE firms increasingly looking to private lenders for funding.
➕ An increasing number of PE firms expected to consider IPOs in the wake of the slowdown as a way to improve capital raising and fund growth plans into new geographies and strategies.
➕ The average length of time it takes from launch to close for PE funds is increasing as institutional investors slow investing and PE firms seek to raise larger and larger funds.
➕ Changing market dynamics are forcing a ‘back-to-the-basics’ approach of sustainable value creation via cost reductions, operational efficiencies, and revenue growth in both buyout and VC.
➕ Significant decline in active VC investing and increased investor scrutiny and concern about inflated valuations in the wake of high-profile failures.
Private Credit: Poised for careful growth, focus on credit quality, and disciplined underwriting? We hope.
➕ JPM anticipates $30b expected to change hands in the secondary market in 2024, driven by liquidity needs and a substantial rise in deal sizes, reflecting a dynamic shift in the private credit landscape.
➕ Heightened investor concern over interest rates and the delayed impact of rate hikes, leading to challenges in borrower performance and an increase in debt restructuring activities.
➕ Global financial institutions, including the IMF, the Federal Reserve, and the European Central Bank, present divergent views on the systemic risk of private credit, with the IMF expressing concerns about market instability and the Fed highlighting the sector’s resilience and growth.
➕ With great opportunity comes great responsibility. Is that a saying? While banks are still cautious about lending, investors are pouring into private credit to fill the gap. The importance of risk management and manager selection should be top of every investor’s mind.
Commercial Real Estate: A period of recalibration and continued sector divergence amid evolving regional trends as 2023 concludes.
➕ All eyes are on interest rates and rising costs for borrowing, materials, labor, and insurance, among other things.
➕ Continued opportunities are expected for investors with dry powder and patience across multiple sectors and regions.
➕ Multifamily, industrial, data centers, life sciences, and biotech, as well as neighborhood retail and self-storage, are continued bright spots, particularly in Sunbelt States in the U.S. and major cities in Canada, including Toronto, Vancouver, and Montreal, to name a few.
➕ Office sector continues to struggle with declines in leasing activity and a surge in vacancy rates. Developers are exploring opportunities to repurpose and adapt existing office spaces. See the 2nd bullet point about patience and dry powder.
Worth your time
Our monthly recommendation of books, articles, research, and announcements we found interesting, important, or just plain entertaining enough to share. Sometimes we’ll have a lot. Other times, not so much. The objective is to share things that are useful, not filler.
➕ Due Diligence 101: Best-in-Class? Third Wire Insights. Our latest blog post discusses performance dispersion in private markets funds, what that means for fund selection, and helping your clients avoid investment platforms using high-pressure sales tactics that have no place in our industry. It also features another hilarious illustration generated using DALL·E.
➕ THIS IS NOT FINANCIAL ADVICE Optimist. Timely movie, given the recent approval of spot Bitcoin ETFs in the U.S. Looks like it’s available on Apple TV and Amazon. There’s the obligatory section on compounding. I’ve said it before, and I’ll say it again: it’s time in the market, not timing the market.
➕ From Unicorns to Zombies: Tech Start-ups Run Out of Time and Money NYT. I don’t know if ‘musical chairs’ is the right metaphor—trying to think of one. Unless it’s a musical chair company that was VC-funded, then IPO’d, then filed for bankruptcy in December because they failed to anticipate the waning demand for musical chairs post-pandemic.
➕ The VC Funding Party is Over. Wired. Another piece on the challenges facing Venture Capital including investor concerns over inflated valuations, the need to rethink exit strategies, and they’re calling the latest tech bust and impending VC bust. Although, we have some thoughts around generative AI and blockchain that may beg to differ.
➕ The Rabbit R1 is an AI-powered gadget that can use your apps for you. The Verge. Call it our tech watch bullet point. Don’t let the word ‘gadget’ in this article fool you. We haven’t tested this thing, but imagine an Alexa or Siri that actually does useful things beyond shopping on Amazon, setting cooking timers, and telling you jokes. Or an iPhone that doesn’t require you to interact with multiple apps to get things done. IMHO, it looks bonkers. (#greenbubble4lyfe)
Disclosure:
This newsletter is for informational purposes only and does not constitute financial, investment, legal, or other professional advice. The information, opinions, and forecasts contained herein are current as of the date of this publication and are subject to change without notice. The information presented in this newsletter has been obtained from sources believed to be reliable, but its accuracy, completeness, and relevance to your personal situation cannot be guaranteed.
Investments and strategies mentioned may not be suitable for all readers and may have different implications for different people. We highly recommend that readers seek advice from qualified professionals before making any investment decisions. Past performance is not indicative of future results, and no representation or warranty is made regarding the accuracy or completeness of the information contained herein.
Third Wire Asset Management, LLC (‘Third Wire’) does not accept liability for any loss or damage arising from the use of this newsletter. By reading this newsletter, you acknowledge and agree that Third Wire is not responsible for decisions made based on the information provided herein.
