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Hedging against inflation with alternative investments

October 6, 2021 Article 3 min read
Mark Dixon Wealth Management Jim Baird Wealth Management

As consumer prices continue to rise, investors concerned about inflation are looking beyond traditional stocks and bonds to hedge against that risk. Our experts discuss alternative investments that could mitigate the negative impact of inflation on their portfolio via Worth.

women working on laptop looking out windowSince the beginning of the year, the distribution of COVID-19 vaccines, abundant fiscal stimulus, and the lifting of restrictions on many activities have fueled the economy and generated a resurgence of optimism among Americans. By the midpoint of the year, some forecasts pointed to potential calendar-year growth in the United States that could be the strongest in nearly four decades.

But there are challenges. The lingering economic effects of the pandemic’s disruption are still apparent in the form of bottlenecks in global supply chains, inventory and material shortages, and a scarcity of skilled labor for businesses. The result has been a surge in prices for various goods and services and the resurfacing of inflation as a legitimate concern. 

Past performance does not guarantee future results. All investments include risk and have the potential for loss as well as gain.

Data sources for peer group comparisons, returns, and standard statistical data are provided by the sources referenced and are based on data obtained from recognized statistical services or other sources believed to be reliable. However, some or all information has not been verified prior to the analysis, and we do not make any representations as to its accuracy or completeness. Any analysis non-factual in nature constitutes only current opinions, which are subject to change. Benchmarks or indices are included for information purposes only to reflect the current market environment; no index is a directly tradable investment. There may be instances when consultant opinions regarding any fundamental or quantitative analysis may not agree.

Plante Moran Financial Advisors (PMFA) publishes this update to convey general information about market conditions and not for the purpose of providing investment advice. Investment in any of the companies or sectors mentioned herein may not be appropriate for you. You should consult a representative from PMFA for investment advice regarding your own situation.

Graph Footnotes

Commodities is represented by the returns of the Bloomberg Commodity Index Total Return, which is composed of futures contracts and reflects the return on a fully collateralized investment in the index. Collateral return of the Bloomberg index is based on 3 Month Treasury Bill rates. During the inflationary periods shown in the table above, collateral yield contributed an average of 5%/year to the index’s return. Today, given that the 3-Month Treasury Bill rate is near zero, the collateral component of an investment in commodity futures is substantially lower than in prior periods.

The Bloomberg Barclays U.S. Corporate High Yield Index is being shown as a proxy for private credit, given the lack of sufficient history for private credit indices. With data from Cliffwater LLC, PMFA estimates that investors in private credit have typically earned an illiquidity premium of at least 1.5% above the high yield index since 2004. The illiquidity premium is represented by the average difference of the Cliffwater Direct Lending Index and the Bloomberg Barclays U.S. Corporate High Yield Index on a rolling quarterly 12-month basis during inflationary periods represented in the chart above.

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