How Some High-Net-Worth Investors Are Positioning Themselves For A Market Crash

High-net-worth individuals are positioning themselves for a potential market correction, according to several recent surveys.

Among the two most common strategies: increasing exposure to niche areas of the market such as private debt, and raising cash.
According to private equity firm Connection Capital, 35% of the company’s high-net-worth clients are allocating 20% or more of their investment portfolio to alternative assets, up from 26% of clients last year. And according to the UBS Global Family Office Report, 45% of ultra-wealthy families — worth an average of $1.2 billion — said they’re boosting their cash reserves. Another 45% are shifting their investment strategies towards fixed income and structured debt instruments to mitigate risks.

Both reports suggest high-net-worth investors may be worried about the short-term performance of the market as we sit near all-time highs.

The wealthiest Americans were concerned when the spread between two-year and 10-year Treasury yields inverted in mid-August, which has historically preceded recessions. Other fears include Britain’s planned exit from the European Union and the year-long trade war between the U.S. and China.

Connection Capital says that it is noting a particular interest in private debt. Private Debt Investor, a publication that tracks this area of the market, found that the aggregate capital raised by North American-focused debt vehicles over the past three years totaled $81.6 billion.

Roughly $39.1 billion of private debt was raised in 2018, according to publication. And though that’s a slight decrease from the record-setting $42.3 billion raised in 2017, it’s still a dramatic increase from a decade ago. $22.7 billion of private debt raised in 2009, a total that was nearly matched in the first five months of 2019 alone.

Part of the reason for this increase is the low correlations between private debt and the overall market, in addition to its relatively strong performance as an asset class.

According to McKinsey Global Private Markets Review 2019, annual returns for private debt have averaged around 10% since 2008 with higher yields than are available in public debt.

One area the private debt market that we believe could be of particular interest is private debt in the consumer industry and, more specifically, in consumer-oriented growth-stage companies. We believe these companies present a great hedging alternative during periods of volatility.

Consumer-oriented companies offering innovative products for daily use—such as plant-based food, functional drinks, feminine hygiene, and cosmetic products—become a safe haven during a recession. We believe that relationships, community, and purpose will become integral to investing in the coming years.

Wonchang Terry Choi is a junior partner and investment principal at 13 Ventures, a New York-based alternative investment firm