Securitize Logo

Investing Through Black Swan Events

A Perspective From Securitize

by Alex Broudy, Technical & Financial Writer
Dec 14, 2021

This is the first post in a series to discuss what’s trending in private equity and alternative investments. Today, we face the unexpected head on.

Throughout history black swan events have reverberated across the global economy in costly and unexpected ways. While they’re impossible to time, investors can plan for black swan events. In times of crisis, private assets with low correlations to public markets provide downside protection, while riskier assets provide growth potential. Experienced and institutional investors typically seek exposure to both public and private asset classes to keep an even keel. This approach has returned steady gains over time and can be particularly useful today.

Using history as a guide, we will review different approaches that succeeded in the past, and how to face the unexpected with a blend of time-honored and newly accessible investment strategies.

From 1918 to 1919, the Spanish flu caused an estimated 25 to 50 million deaths, upending daily life while propelling newer and non-correlated market segments forward. During this period, investors with alternative asset exposure to art outperformed. During the world’s most recent black swan event -- the Covid-19 pandemic -- investors have observed a similar outperformance. Why?

Pricing Uncertainty

In a world of instantly interconnected commerce, diversification matters now more than ever.

Diversifying into private equities and alternative investments like real estate and art can help investors gain low-correlation exposure and offset risk in turbulent times. For an asset class that has averaged returns of 10.48% from 2000 - 2020, it's easy to see why interest in and exposure to alternative investments has increased recently -- the risk-adjusted price is right.

Evaluating Risk

While private equities have long outperformed public equities, assessing cross-asset performance has been difficult. Savvy investors often look to internal rates of return (IRR) to evaluate investability across asset classes. The higher the IRR, the greater the potential for payout. So, when IRR remains high despite uncertainty it would be common opinion to assume that market participants have priced in risk.

Although past performance does not indicate future valuation, identifying trends can help investors find their footing in a world in flux.

Identifying Trends

In 2021, Securitize saw a variety of private equity trends take place on our alternative investment platform. Shortly after the latest Covid-19 “variant of concern,” Omicron, hit, Securitize saw alternative asset volume pick up as investors traded securities across primary and secondary markets. Moving into late 2021, we see a risk-on sentiment developing as well.

These insights are made possible by our digitally native platform that provides unaccredited, accredited, and institutional investors the data and optionality needed to face black swans with confidence.

Facing Black Swans

While black swan events like the coronavirus cannot be timed, they can be anticipated using different financial instruments.

This sophisticated strategy minimizes downside risk while maintaining price exposure to the underlying. But not all trading venues are created equal and not all asset classes can be hedged in the same way.

Balancing Unequal Parts

Hedging usually requires the optionality to place bets on both sides of a trade. In mature public markets like the United States, liquidity is deep and futures options are cheap. In less liquid private markets hedging is difficult but, as we’ve seen, the reward often outperforms.

To balance these unequal parts, Securitize developed the first end-to-end alternative investment platform for digital asset securities. As a FINRA member broker-dealer and the first SEC-registered transfer agent operating with digital asset securities, Securitize provides seamless access to private capital raises, primary markets, and secondary trading all from one compliant venue.

Providing Portfolio Ballast

Strict fiduciary rules mean institutions seeking digital asset securities exposure will need to first find a trusted provider. Fortunately, they can find peace of mind and a convenient way to hedge overall portfolio performance with Securitize.

Yielding Bitcoin

For accredited and institutional investors seeking actively managed financial instruments, our Bitcoin Yield Fund brings the ability to securely earn yield from the best performing asset in modern history. Yielding 2.84% APY since the fund’s inception in late July 2021 through late December 2021, this fund is designed for those with a high risk appetite looking for annual return potential.

For investors looking to hedge uncertainty via alternative assets like private equity, Securitize offers a number of low-fee options as well.

Outpacing Slippage in 2022

As we move into the latest stage of the Covid-19 pandemic, achieving risk-adjusted returns will become more difficult using traditional tools. The slippage between price and earnings will increase as distortions to the underlying economy reverberate across public markets. And smart money will look elsewhere.

Looking out to 2022, institutional and experienced investors should keep optionality top of mind. As we’ve seen, hedging a possible downturn in public markets with a small allocation to digital asset securities or private equity can improve overall portfolio performance.

While we can’t time it, we do anticipate that inflows into private equity will continue into 2022 as investors search for yield in a topped-out public market. Moreover, we believe that allocating a percentage to alternative assets can act as a hedge in volatile times.*

© 2022 Securitize, LLC
All rights reserved

There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio.

Check the background of Securitize Markets on Finra BrokerCheck.

Securities are offered through Securitize Markets, LLC, (“Securitize Markets”) a registered broker-dealer and member FINRA/SIPC. Neither Securitize Markets, nor any of its affiliates provide any investment advice or make any investment recommendations to any persons, ever, and no communication through herein or in any other medium should be construed as such. Securities offered on the Securitize Markets ATS have not been registered under the Securities Act of 1933 and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements. Assets listed herein, such as digital assets or tokens using blockchain, are speculative, involve a high degree of risk, are generally illiquid, may have no value, have limited regulatory certainty, are subject to potential market manipulation risks and may expose investors to loss of principal. Investments in private placements, start-up investments in particular, are also speculative and involve a high degree of risk. Investors must be able to afford the loss of their entire investment. Eligibility to buy and sell securities on the Securitize Markets ATS is determined by Securitize Markets in its sole discretion. Offers to sell, or the solicitations of offers to buy any security can only be made through official offering documents that contain important information about risks, fees and expenses associated with the applicable securities available for trading on the Securitize Markets ATS. Investors should conduct their own due diligence, not rely on the financial assumptions or estimates displayed herein, and are encouraged to consult with a financial advisor, attorney, accountant, tax advisors, and any other professional that can help you to understand and assess the risks associated with any investment opportunity. Past performance is not indicative of future results. Neither the Securities and Exchange Commission nor any federal or state securities commission or regulatory authority has recommended or approved any investment or the accuracy or completeness of any of the information or materials provided herein or through any references/links herein. Any financial projections or returns shown herein are provided by the issuer of the relevant security and Securitize Markets has not verified the accuracy. Further, there can be no assurance that any valuations provided by issuers are accurate or in agreement with market or industry valuations. Securitize Markets and its affiliates make no representations or warranties as to the accuracy of such information. Securitize Markets may collect certain information about you that helps us comply with various securities regulations and rules and the USA PATRIOT Act, a Federal law that requires all securities firms to obtain, verify, and record information that identifies each applicant. The information also helps us more fully understand your investment profile and identify what types of investments or strategies may be suitable for you. The term “Investors” used on this website, typically refers to accredited investors where applicable. Please note: if we cannot verify the information you provide, we may be required to restrict or deny your account. Trading during Extended Hours Trading Sessions carries unique risks, such as greater price volatility, lower liquidity, wider bid/ask spreads, and less market visibility, and may not be appropriate for all investors. There is no guarantee that a diversified portfolio will enhance overall returns, outperform a non-diversified portfolio, or prevent against loss. By accessing this site and any pages thereof, you agree to be bound by our Terms of Service and Privacy Policy.