Insights From Carl Ludwigson: Unwinding the Fed Balance Sheet
October 4, 2023
Earlier this month, Bel Air Investment Advisors Managing Director Carl Ludwigson spoke to a diverse audience of financial professionals at Future Proof, the world’s largest wealth festival and a melting pot for the wealth management professionals from across the country.
During his panel, moderated by MarketWatch markets editor William Watts, Carl shed light on five distinct strategies. Changes in monetary policy by the Fed have shaped specific asset classes and potential pathways for investors, and the following asset classes and accompanying strategies are intended to help investors not just navigate, but also profit through, the current economic environment.
1. Direct Lending
Higher rates at the front end of the yield curve from the rapid shift in monetary policy means floating rate private debt is now generating an equity-like expected return.
2. Private Multi-Family Real Estate
Cap rates have increased with changes in monetary policy and higher mortgage rates make single family homes less attainable. The US is structurally under-housed, so supply demand dynamics still favor multi-family apartments, particularly in regions with demographic tailwinds.
3. VC/Growth Equity
Monetary policy changes impacted private market valuations with more of a lag than public markets. Now the VC/Growth space has switched from a seller’s market to a buyer’s market as companies seek the next round of capital from a smaller pool of allocators.
4. Value Stocks
If changes in monetary policy lead to a higher-for-longer scenario for interest rates then a balanced allocation to value stocks can keep up with growth stocks over time and reduce portfolio level volatility by hedging against the significant factor swings we have observed recently.
5. Rate Volatility and Yield Curve
As the Fed’s balance sheet roll off continues, it should help reduce yield curve inversion while rate volatility remains elevated. Products that are long volatility and long a curve steepener would benefit in this environment while potentially hedging risks associated with equity, credit and real estate exposure.
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