Pagnato’s clients also invest in farmland, drawing income from leasing, he says, which can generate 8% to 10% total returns with 4% to 5% annual cash flow. Agricultural financing, short-term funding to help industrial farmers plant a crop, can also generate an 8% to 10% total return.
“We also like microlending, investments available in the public marketplace through something like a LendingTree or a SoFi,” says Pagnato. “We feel this is a good alternative because it’s not municipal bonds or corporate debt. It’s not in the equity market. It tends to be consumer cyclical but it has a lot of non-correlation. We shoot for a total return of 8% to 9% annually, with a cash flow of around 6% to 7%.”
As monetary tightening occurs, higher interest rates reduce the value of bonds and dividend-paying stocks, which may lead investors to seek protection, in lieu of more income, from alternative investments. According to a June survey by New York-based alternatives platform iCapital Network, most advisors to the affluent are planning to increase their clients’ allocations to private equity, hedge funds and private direct deals over the next 12 months, motivated mostly by the desire to achieve better investment returns and defensively diversify portfolios.
These advisors could also be playing defense against the Trump administration. While the president’s policies move markets, it’s often his rhetoric and his candid social media presence that captivate investor attention.
Trump’s tweets concern merger arbitration fund managers as well, says Gregg Loprete, of New York-based Water Island Capital, portfolio manager of the Arbitrage Credit Opportunities Fund. “With antitrust issues, the courts should probably be the ultimate determinant, but we’ve seen him jump into the issues,” says Loprete. “Trump was out there tweeting about the AT&T-Time Warner deal and it threw a lot of politics into economic policy. It’s been challenging for investors to decide what to do.”
The $46.3 million Arbitrage Credit Opportunities Fund (ACFIX), launched in 2012, is an unconstrained bond fund; it is not tied to any benchmark and its managers have few limits for what investments they access. They employ Water Island Capital’s event-driven investment philosophy to find investment catalysts like mergers, refinancing and regulatory changes. ACFIX carries a 1.43% net expense ratio. As of June 29, the fund had five-year annualized returns of 2.54%, according to Morningstar.
“There will be different climates for event-driven investing. What we like is that we feel like we can generate returns not impacted by changes in interest rates or equity volatility,” says Loprete. “We’re not targeting absolute return, we’re looking at total return and income, but when I look at the returns we’ve put up since inception, it’s looked a lot like an absolute return fund.”
Trump’s social media posts move markets. On June 1, he seemed to reveal a positive jobs report early by tweeting that he was “looking forward to seeing the employment numbers at 8:30 this morning,” a seemingly innocuous statement that prompted Treasury yields to rise, as well as the value of the dollar.
Unpredictability causes and exacerbates volatility—volatility in the U.S. equity market spiked in early February as positive jobs numbers and inflationary signals boosted Treasury yields. Volatility has remained elevated in part because of the president’s protectionist language.
The uptick in volatility is a tailwind for certain alternative strategies and funds. For example, Eric Cott, director of financial advisor education for the Options Industry Council, has seen increased interest in using options to provide downside protection for an equity allocation via put-buying strategies.