Alts Stood Tall in Q2, Could Deliver Again in Second Half

While stocks set an impressive pace in the second quarter, the performance of alternative asset classes is also worth a look.

During the June quarter, nine of the 10 major alternative asset classes posted gains. This underscores the point that “alts” not only deliver portfolio diversification, but upside potential as well. It’s possible that more of the same will be in store in the back half of 2023.

Predictably, the Federal Reserve is likely to loom large in the near-term outlook for alts. Commodities, which are among the most recognizable alternative assets, are considered inflation-fighting assets. However, there are signs inflation is cooling. With that in mind, the Fed could opt to not hike interest rates in the second half of 2023. This could trigger retrenchment by the U.S. dollar. That would be beneficial to dollar-denominated assets, such as the greenback.

Interestingly, commodities were the lone offender among alternative asset classes in the June quarter. This indicates that the group could enjoy a second-half rebound, particularly if the Fed cooperates.

Alts Q2 Review, Second Half Outlook

Helped by the fact that stocks rallied in the prior quarter, alts with higher correlations to equities outperformed their less-correlated counterparts.

“Real asset returns were mixed. Broad commodities fell on concerns of slower growth, a faltering China reopening, and a hawkish Fed. Real estate was up on solid housing data. It shrugged off rising mortgage rates, poor housing affordability, and commercial real estate concerns. Gold fell sharply in sympathy with the broader commodity market as the risk-on sentiment took hold and rising real rates likely served as a headwind,” according to First Trust.

Alts with the highest correlations to the S&P 500 are hedged equity strategies and real estate.

Alts’ second-quarter performance saw help from bitcoin and some of the other larger cryptocurrencies. It’s possible that theme will continue in the second half if the Securities and Exchange Commission (SEC) warms to the idea of approving a spot bitcoin exchange traded fund. Such a decision would likely be one of the most historic events in industry history.

“While each case is unique, we believe the core driver seems to be the desire to bring cryptocurrencies, their trading and relevant exchanges, under the SEC’s regulatory umbrella,” added First Trust. “At nearly the same time, the world’s largest asset manager filed for a Bitcoin ETF that would hold digital Bitcoin and not futures. Previously, all non-futures-based Bitcoin ETFs have been turned down by the SEC. The filing seems to have signaled to the market, that despite the turmoil and ongoing SEC actions, this asset manager sees a path to market.”

For more news, information, and analysis, visit the Alternatives Channel.