In February and March this year, we saw a sneak peek of what it looks like when equity markets’ valuations begin to revert to their historical mean. Very quickly, a third of the market’s value disappeared. The graph below shows the S&P 500 index and HCP’s multistrategy fund HCP Black, which makes wide use of alternative investment targets.
In terms of valuation, the equity market did not even reach its historical mean in March. The graph below shows the total market capitalization of American companies (Wilshire Total Market) against US GDP. The y-axis is marked in trillions of dollars (T).
Valuations would reach their recession-era historical mean if markets collapsed to a third of their current level.
From this we come back to our first graph and the reason why diversifying into alternative investments, such as the HCP Black fund can significantly improve the benefit of diversification and thus decrease an investment portfolio’s risk during economic shocks. If you carry a significant amount of risk in your own business, or maybe you are a startup investor or just a stock investor who felt uncomfortable during the crash in March, this is an opportune time to familiarize yourself with alternative investing. Even a small allocation from the entire portfolio into alternatives can increase the entire portfolio’s resilience through the cycle. Such is the difference between alternative and traditional investments that it can be clearly seen in February’s and March’s returns. More information about our solution for risk management can be found here.