How do alternative investments perform during an economic recession? 


## **Introduction**

In times of economic uncertainty and market volatility, investors often seek alternative investment options to diversify their portfolios and protect their assets. The current landscape of alternative investments offers a wide range of opportunities, including art, crypto, NFTs, finance, and more. This article aims to explore the performance of alternative assets during economic recessions, providing valuable insights for investors seeking to navigate challenging market conditions.\
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The investment community is increasingly focused on inflation control and the speed at which governments can address it. To navigate these challenges successfully, investors are turning to alternatives. Francois Savary, Chief Investment Officer of family office advisers Prime Partners, emphasizes that private assets, including illiquid private markets and substantial cash allocations, are becoming more attractive to investors with long-term horizons. Cash is seen as king in an environment where inflation is expected to persist. Allocating to private assets allows investors to diversify their portfolios, seek higher returns, and invest in fundamentally strong companies operating in niche markets.

## **How do alternative assets perform during a recession?**

Traditionally, investors have shifted their asset allocation away from stocks and towards bonds, gold, or cash during recessions. However, alternative investments have gained significant attention in recent years. Assets such as fine art, collectibles, gold, real estate, commodities, fine wine, and whisky have become more accessible to retail investors. Additionally, new alternative assets like cryptocurrency and NFTs have emerged, offering unique investment opportunities.

To understand the performance of alternative assets during recessions, we will examine two recent market downturns: the 2022 downturn (January to June) and the COVID-19 recession (February to April 2020).

![Chart depicting the top-performing assets during the market crash from January to May 2022](https://hedonova.b-cdn.net/Hedonova%20images/%20All%20Hedonova%20blogs/How%20do%20alternative%20investments%20perform%20during%20an%20economic%20recession/biggest-gainers-during-the-current-market-crash-january-2022-through-may-2022-min.webp)

## **Alternative asset performance in the 2022 downturn**

Although the National Bureau of Economic Research (NBER) has not officially declared a recession for 2021 or 2022, the markets have experienced significant declines. The S&P 500 Index was down over 20% by the end of June 2022, with cryptocurrencies, particularly Bitcoin, experiencing substantial losses.

However, not all alternative asset classes have been equally affected. Oil has been the top performer during this downturn, with a 34.16% return in the first half of 2022. Residential real estate, investment-grade wine, and whisky also delivered solid returns, with gains of 13.48%, 10.93%, and 8.46% respectively. Surprisingly, trading cards and art remained stable, outperforming the S&P 500 by a significant margin.

The strong performance of oil can be attributed to traditional inflationary pressures and the global shortage of oil reserves caused by the Russian invasion of Ukraine. The art market, despite stock market volatility, continued to break records at auctions, demonstrating its resilience during economic downturns. Fine wine's performance remained steady, outperforming global equities, while whisky showcased its appeal as a physical asset with potential value appreciation.

![Chart illustrating the best-performing assets across various market crashes](https://hedonova.b-cdn.net/Hedonova%20images/%20All%20Hedonova%20blogs/How%20do%20alternative%20investments%20perform%20during%20an%20economic%20recession/overall-top-performing-assets-during-recent-market-crashes-min.webp)

During the three stock market crashes examined between 2018 and 2022, certain assets performed better than others. Agricultural commodities, including crops and livestock, and fine art emerged as the top-performing assets overall. They were followed by gold, whisky, farmland, and wine. Sports cards and bonds remained relatively stable during these downturns. Platinum and oil experienced declines but still outperformed the broader market index, S&P 500. On the other hand, Bitcoin performed even worse than the stock market during all three crashes.

In our study, we also analyzed the correlation between these alternative assets and the stock market from 2018 to 2021. Correlation refers to how closely the price movements of different assets align. We found that many of the assets mentioned above had a moderate to high correlation with the stock market, meaning they tended to move in similar patterns. Some assets had lower correlations, indicating a degree of independence from the stock market. Additionally, a few assets showed an inverse correlation, meaning they moved in opposite directions to the stock market.

However, it's important to note that correlation doesn't always remain consistent during market crashes. Other factors come into play that can affect asset performance.

## **Alternative asset performance in the COVID-19 recession**

The COVID-19 recession, lasting from February to April 2020, affected almost every industry and asset class. The S&P 500 fell over 19% during this period, while alternative assets experienced varied performance.

Gold, often considered a safe haven asset, showed resilience by gaining 12.4% during the aftermath of the dotcom bubble and 6.14% during the COVID-19 recession. Silver, however, experienced similar downturns to the stock market. Fine art auctions quickly adapted to the pandemic by transitioning to virtual sales, which proved successful. Sports trading cards displayed stability and strong returns, appreciating more than 130% annually since 2017.

Residential real estate, trading cards, and investment-grade wine exhibited resilience against the global pandemic and economic recession, showcasing their ability to maintain positive returns.

## **The rise of alternative asset allocations**

Research from AssetTribe, a club of family offices, wealthy investors, and deal sourcers, indicates that 53% of sophisticated investors in Europe and the UK anticipate increasing their appetite for alternative assets in the next 12 months. The motivation behind this trend includes concerns about inflation, the need for portfolio diversification, and the pursuit of higher returns. Real estate, infrastructure funds, forestry, and direct stakes in later-stage private equity projects are among the favored alternative assets.

Furthermore, the impressive performance numbers achieved by prominent private equity firms like Advent International, whose flagship buyout fund is currently delivering a 90% return, have bolstered investor confidence. While critics argue that return numbers may be exaggerated, the conversations surrounding alternatives are gaining momentum, and clients are asking crucial questions about the timing and risks of increasing allocations to illiquid assets.

![Chart depicting the preferred types of alternative assets for sophisticated investors during recessions](https://hedonova.b-cdn.net/Hedonova%20images/%20All%20Hedonova%20blogs/How%20do%20alternative%20investments%20perform%20during%20an%20economic%20recession/types-of-alternative-assets-sophisticated-investors-are-mostly-likely-to-invest-during-recession-min.webp)

## **The changing role of alternatives in portfolios**

Traditionally, alternatives served as bond proxies to compensate for the decline in confidence and certainty surrounding fixed income allocations. However, they are now driving portfolio returns rather than acting as hedging tools. In an inflationary environment, alternatives are likely to remain popular, especially considering the recent geopolitical tensions and the ongoing pandemic-era government spending.

Chief Investment Strategist Christian Gattiker from Swiss bank Julius Baer observes a growing interest in private equity, fueled by impact and sustainability investing trends. This shift reflects a broader change in perception, moving away from passive filters based on environmental, social, and governance (ESG) criteria and toward concrete investments that make a difference. Private equity offers investors a direct stake in companies at the forefront of innovation, presenting an opportunity for capital gains.


In uncertain economic times, investors are turning to alternative investments to diversify portfolios and protect assets. The performance of alternative assets during recent market downturns, including the 2022 downturn and the COVID-19 recession, has been analyzed. Certain alternative assets like oil, residential real estate, fine wine, and art have showcased resilience and outperformed the stock market. Research indicates that sophisticated investors are increasingly interested in alternative assets due to concerns about inflation and the pursuit of higher returns. Private equity is gaining traction as a means of driving portfolio returns and aligning with impact and sustainability investing trends. Alternatives are now viewed as direct investments with potential for capital gains, driving a shift in investment strategies away from traditional hedging tools.

How do alternative investments perform during an economic recession?

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