A calm approach to turbulent markets

A Calm Approach to Turbulent Markets: How Alternatives Can Help Provide Balance

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NANCY FAHMY: Hello and welcome to today's program, I'm Nancy Fahmy. Thank you for joining us for this conversation we are calling “A Calm Approach to Turbulent Markets: How Alternatives Can Help Provide Balance.” Investors are increasingly aware that the market environment is challenging.  We’ve seen increased volatility in the markets since the start of the year, and that could continue for the foreseeable future. We have a premier alternative investments platform partnering with only the best institutional quality asset managers in the world. We have significant resources and capabilities in the Alternative Investment space because it's an important source of value to our clients. We have an institutional due diligence capability focused on manager selection and investment acumen and we recognize that rigor around manager selection is key in this space. Given our size and scale, we have access to capacity constrained offerings typically on an exclusive basis. The Chief Investment Office recommends an appropriate allocation to Alternative Investments in particular given the current market environment to help achieve client goals. It's a pleasure to now introduce Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank, who will host a conversation with Jon Gray, President and Chief Operating Officer of Blackstone. They’ll offer more insights into the current market environment and the role that alternative investments could potentially play in your portfolio.

CHRIS HYZY: Nancy, thanks for that great introduction to this important and very timely topic. As you noted, there is certainly a lot of change happening in the markets, the economy, and the world overall, right now. Inflation is still at a four-decade high, perhaps it's coming down soon. But, interest rates are rising, particularly at the back end of the curve, and the Fed has yet to really engage in an aggressive tightening stance. And, the tragic war in Ukraine is adding new complexity to this outlook. In the U.S., the job market, however, is still what some would say booming, and nominal growth is still not only strong but well above average. At the same time, there are an ongoing supply chain disruptions and job openings that are well outpacing the number of workers that are available. And, that is creating somewhat of a drag overall on the full economic takeoff, not to mention what's going on in China in terms of the lockdown. Amidst all of this change, we've been hearing from more and more clients who are uncertain about the future, including how to navigate the shifting risks and opportunities. Now, we've seen times like this before, perhaps not as converging like this before where everything is hitting at once coming out of a pandemic. So, you can just see that volatility is not only high and elevated, it's likely to remain so. That's a lot of what our discussion will cover today, including how alternative investments could play a very important role in the next few years. So, with that, I'd like to welcome my special guest, Jon Gray, President and COO for Blackstone.

JON GRAY: Chris, it's great to be here.

CHRIS HYZY: It's great. Blackstone is a leading global investment business focused on providing long-term value for pension funds, large institutions, and individual investors. They specialize in a variety of alternative asset classes, including private equity, real estate, credit and hedge funds, as well as infrastructure, life sciences, and so much more. So, Jon, we talked a lot about the macro end of things at the opening dialog here. I want to dive a little bit deeper into that. We talked about this convergence of this changing landscape, we call this a new cycle, new regime needs new portfolio thinking. Maybe not new from the standpoint of a few decades ago, but certainly new from the standpoint of a post-global financial crisis world. So, can you give us your view on the economic environment today, particularly as it relates to rates, inflation, and all the other principles that we all have been watching and witnessing for the better part of the last six months or so?

JON GRAY: Well, I'm going to start on the positive note, which is you reference the strength of the U.S. economy. And, we've got some unique insights given the scale of our portfolio. And, what we see on the ground today is very positive. We see strong consumer, strong businesses, strong capital investment, people are starting to travel again, even business travel is picking up. Tech spending is strong. Obviously, the energy sector is strong. And, this isn't a surprise given that we have very low levels of unemployment. We also have very strong wage growth. And, we have all this pent-up savings coming out of this environment, this huge stimulus. So, a strong economy is the big positive here. The glass half full side, of course, is the inflationary pressures. And, what we're seeing there is pretty pervasive, and we think it's likely to be more persistent. We're seeing obviously, materials costs go up, transportation costs, energy costs, rental costs for individual consumers. And then, of course, employees are seeking more in wages. When we talk to our companies, their number one concern is the availability and cost of labor. And, we don't see that abating. And, it makes sense for workers because they're seeing their cost of living go up. And so, the risk of some sort of wage-price spiral picking up some steam is something I think we're all concerned about. And so, I think we have to accept the fact that this inflation is unlikely to be transitory that the Federal Reserve is going to have to respond as it's begun to by tightening, by shrinking its balance sheet, by raising rates. And, that is really an inflection point for the global economy. It's something we all have to think about as investors that obviously creates a lot of volatility. But, I really think we've moved from a world over the last 40 years where inflation and interest rates were in secular decline that really ended in the heart of COVID. And, we’ve begun after this huge policy response to move into a new era. And, we really see that as something that's going to stay. Now, the questions will be, "Will the weight of rate hikes and some of these inflationary pressures cause the U.S. economy to slow at some point?" And, yes, that will happen but I think in the near term we’re in this stronger growth, higher inflationary environment, certainly here in the United States.

CHRIS HYZY: That's a great point. I want to dive a little bit into two principles you just talked about there. We've been in this backdrop for the better part of three-plus decades of declining interest rates. Post-global financial crisis, we've been in a backdrop of excessive liquidity sometimes being pulled back. And then, once it's pulled back, it's added to more than the pullback occurred. And now, we're starting to go through what is a balance sheet contraction. Not yet, but in the next couple of months, the Federal Reserve likely to start that, and on a campaign potentially over the next two years of wiping off some 2 trillion from their balance sheet. So, when we think about interest rates backing up, the long end of the curve has done a lot of what the Feds hard work is about to do. Mortgage rates are well above 5% right now. As you sit here today and you see what is going on, take us through your thought over the next five years where growth is relative to what we've all seen, pre-pandemic, and take us through where you think interest rates, not necessarily from a number standpoint settle in at but are we going through rising interest rates consistently? Or, do we level off at a certain point?

JON GRAY: Well, it's very hard to have a crystal ball to really look out over time because there's so many factors involved, but maybe I'd start with the rates. And, that anchors with the inflation. We were operating in the pre-COVID world of 2% inflation and 2% rates. And, it seems reasonable to us that, well, maybe we'll come down at some point from the very elevated level, certainly the war, COVID shutdowns in China, some of the supply chain challenges. Some of this will ease. We'll have easier comps again over time as you compare higher levels of inflation, but we're going to be at a more elevated level. What does that mean? Does it mean we're operating in a 4% inflationary environment? And therefore, long rates, I would think, would be higher. It's hard to prognosticate exactly. There are still some demographic trends that are deflationary, technologies deflationary, but I would presume that will be in a higher sustained rate and inflation environment. I don't know if I'd put an exact number, but certainly higher than the two. And, it would seem to me it would be closer to four than two if I was guesstimating. It's hard to say. Now, on the growth side, on that question, I think we've got these really good tailwinds near term. But then, you look, again, at population growth, which has slowed plus productivity. And so, I would think our growth would go back to the levels we were probably in pre-COVID environments. So, slower growth, again, back towards sort of the 2-ish percent, 2.5% range and a higher rate and inflationary environment. But, of course, it's hard to know that stuff, and predicting that can be very dangerous.

CHRIS HYZY: No question about it, particularly as it relates to the big lag effect that Federal Reserve monetary policy can have. Some would argue that it's even longer lag nowadays just because of all the debt that was taken out of the household and corporations and placed on government balance sheets. So, with that, as another backdrop, I want to shift a little bit more towards a big what if. Now, what if the balance sheet tightening, higher rates, housing stabilizing, perhaps stalling out a little bit, the lockdowns in China, extended crisis in Ukraine converge and put a big weight on the global economy, not to mention what's going on in Europe? And now, all of a sudden, the Federal Reserve potentially has to stop in their tracks. Does that, in your opinion, create a little bit more volatility once we kind of move towards that higher rate structure? I asked that because regardless of what scenario we're talking about, we're talking about alternative investments today. And, that's setting up a backdrop where various scenarios could ultimately play out and the need for alternative investments is still there. Would you agree on that?

JON GRAY: I would definitely agree on the need for alternative investments that classic 60/40 is hard to manage in the environment we're shifting into. I also think your question is really one about, are we going to tip into something that's very challenging, the Fed pulls back? I think it's possible over time. I still think the forward momentum near term is very strong. And so, that would not be my base case, but we could debate could that happen nine months from now, 18, 24 months. At some point, the weight of the tightening combined with the cost to consumers of higher inflation will slow growth. And so, I think that does create a bigger risk to end up in something a little more stagflationary where you end up with subpar growth, even lower growth, and higher inflation? And, that'll be a tougher dynamic for the Fed. I still think ultimately, the Fed is going to have to operate at higher rates. Even before COVID, we had 2% rates when inflation was 2%. Today, we've got 8.5% inflation, it clearly argued. So, I think the Fed would then have to pause. I don't know if they would loosen policy. But, the way I think about it as a long-term investor is you have to think about us moving towards a higher rate environment, and therefore an environment where multiples are probably lower than they were in the past period that we've been experienced certainly in the last year or two.

CHRIS HYZY: So, Jon, you probably have more conversations with various types of investors than many people. You also have some conversations with companies, obviously, operating companies. Let's talk a little bit now, let's toggle over and shift towards oil prices, commodity prices in general, and even the geopolitical landscape. What's your view on just the general backdrop of reflation that's occurring in oil and commodities, and then ultimately, just the geopolitical risk equation that's going on out there?

JON GRAY: So, on the geopolitical, unfortunately, almost all of these issues translate into broader inflationary pressures. So, if you think about Ukraine, Russia, what does it mean? It means less oil and gas availability, which means higher prices in the energy sector. It means less wheat availability, higher food prices. If you think about U.S.-China tensions and companies being worried about supply chain or the COVID challenges right now in China, you would say that's going to lead to companies storing more goods, wanting to have more redundancy, shifting to higher-cost locations, again, driving higher prices to consumers. I think that's the world we're heading into. Decarbonization, which is something that we all believe in, again, is inflationary, unfortunately, because we're going to try to find other sources of energy that in the near term will have higher costs. So, I think most of these trends lead us to think again about inflationary pressures. Now, one of the things I worry about is investors say, "Well, I don't want to invest globally, I'm just going to invest in the U.S." And, what I'd say to that is the largest U.S. companies, they're globally exposed. So, it's very hard to say I'm not going to be exposed to the world. And also, sometimes markets as you know, Chris, can react. Think about post-Brexit, everyone's, "No UK." We went very long into the UK. It's been a great place to deploy capital. Brexit's hurt their growth in the near term, but long-term, their prospects look pretty good. So, what I would say about the geopolitical is, there are risks that are always out there, you want to be mindful of them, but you don't want to overreact. And, for investors, I want to take the big picture view, not what's happening sort of news of the day. And, the big picture is this inflection point as we move out of the low inflation, low-rate environment to the higher rate, high inflationary environment. And, I look at these geopolitical issues through that lens and they tend to contribute to that, which, unfortunately, I think, makes it harder for all of us as investors.

CHRIS HYZY: Yeah, no question about it. And, with so much that we've talked about, we didn't even touch on national security, cyber security, technology dominance, regionalization, from globalization. There's so many other things that we could touch on. But, we've built a good foundation here through this initial dialogue around the macro end of things and where we're headed. So now, let's switch over a little bit more towards where the pendulum is swinging now, which is all about the nuts and bolts, the guts of why now, why to discuss the inner workings of alternative investments in this broader backdrop. So, with that, the whole asset classes as you know very well, your whole team, the company in general is evolving very quickly, there's new alternative investments that are broadening themselves out, new asset classes or sub-asset classes that are coming. Now, once managers were open only to institutional investors in that regard. Now, they are more willing to provide these attractive offerings to individuals at a variety of wealth levels. Really what's behind all this?

JON GRAY: So, really starts with the alternative business going back 35-plus years, which really was more like a small club. There were endowments, pension funds, maybe some sovereign wealth funds, and a small number of high-net-worth individuals, and they invested in a relatively small set of assets, the private equity, real estate private equity, distressed credit trying to get the highest returns. And, investors have done very well for a long period of time in that area. In fact, if you look at the institutions that have the greatest exposure to alternatives, particularly the endowments, they've had the best long-term performance. And, it's true in the pension fund world as well. As alternatives matured, from something sort of more exotic sort of off to the side, institutions began to realize I can do other things in alternatives. I can invest in growth equity. I can invest in life sciences. I can invest in infrastructure, direct lending and credit, Core Plus real estate. There's a whole big universe and still deliver what they think and we've seen over time to be better risk-adjusted returns. And, you get to the point today where large institutions are almost a third of their assets in alternatives because they're trading some liquidity for higher returns and they have these long-term liabilities. And so, it makes a lot of sense for them. Now, as it relates to individual investors, I would say there have been a couple of challenges. We really introduced going back more than a decade drawdown funds, our buy it, fix it, sell it private equity, real estate private equity, to institutions like Merrill who's been an amazing partner, B of A's private wealth area as well. And, that's been great because individuals have gotten exposure to those drawdown funds, they've gotten the benefits of those returns. But, what they've realized is it doesn't work for everybody because they're long duration in nature, they don't have the kind of liquidity. So, they worked for, again, a smaller subset of individual investors. And then, some of the more perpetual products, non-traded REITs, non-traded BDCs. There were people who offered these but I would say they generally didn't have a lot of investing experience and they charged a very high level of fees. And, the customer experience ended up not being good. And so, we have really, I think, led the charge in this industry to say, "Hey, let's build up a team that can do education for financial advisors and individual investors around alternatives. Let's offer our traditional drawdown funds. But then, let's also introduce some of these perpetual products that can be catered towards individual investors that can provide 1099s instead of K-1s that can provide liquidity features, that can provide current income, and where the dollars go in the ground." And, this becomes increasingly attractive. And so, individual investors who today are sitting at 1 to 2%, allocated to alternatives, I think are saying, "Wow, this makes sense to get the same benefit institutions have." And, I think what's really sort of a tipping point here is the whole backdrop to the conversation we've had, which is we're moving into this different environment. In a traditional 60/40 exposure,  I don't want to have 40% exposed to long-duration fixed income. And, a lot of the stocks I may own may be exposed in this kind of environment. Are there other things? And so, I think the combination of the evolution of the products, the performance over time, and the environment we're moving into, all of that is going to lead individual investors to move in this area. We’ve begun to see that in a big way at our firm. We're raising significant amounts of capital. And, I think it's because investors see all of this. And so, it really is sort of a new era as it relates to individual investors and alternatives.

CHRIS HYZY: Yeah, Jon, you hit on really many, many important principles. But, two very important ones and two elements that are now starting to gather momentum, at least in my opinion. One of which is this concept of time to develop. It's long known that investments, long-term investments obviously have time on their side. Liquidity is a big component of that, and you're going to give up some liquidity in the short term to achieve that time to develop. So, what aspect of that, plus the fact that you mentioned new structures or at least structures that are now coming back in favor, whether it's a BDC, like you mentioned, a business development company? Let's switch over now to the strategy side of things. What strategies may be right for this type of environment, this new cycle?

JON GRAY: I'll start with what you don't really want. I think cash is dangerous because of the risk of inflation eating into purchasing power. I think long-duration fixed income, again, owning a 99-year bond that pays you 2%. That's something to worry about. I think a business is highly exposed to input costs. A big company in the healthcare space was talking about their labor costs going up a bunch and their customers on the other side don't give them a lot of pricing power. Think about industrial businesses with exposure to energy and labor and transportation and may not have the ability to raise the prices to offset that. So, the question then is, what does work? So, I would say owning floating-rate debt. So, direct lending structures that you see in these private BDCs, these non-traded BDCs, what they offer is the ability to get the increase in return from rising rates because the customers or borrowers are charged, essentially the floating rate plus a spread. So, every time the Fed raises rates, returns go up. Then, the question is, are you doing this by taking undue credit risk? And, I would say based on our own experience, it's very sound in terms of loan to value and coverage and so forth. And so, this is a way, again, to get exposure to fixed income, current income without having duration risk. Similarly, in these non-traded REITs, the idea is you want to own shorter duration assets. So, you don't want to own a 20-year office building with a flat rent because that's going to react like a bond. But, if I own rental housing, or self-storage assets, or last-mile logistics where the lease lengths are short, and I don't have much input costs. The buildings are built, I don't have much labor at all associated with that, so my costs are fixed, and yet, I've got the ability to reset rents as markets evolve over time. And so, owning hard assets whose replacement cost is going up in this kind of environment makes a ton of sense. So, to me, those are two good examples of more of these perpetual-type products that make sense. And then, on longer-term drawdown funds, you could do things like private equity or growth equity where you're making a long-term capital appreciation bet, where you're working with the best-in-class manager who's investing in terrific companies trying to get real capital appreciation. So, I think you can get at alternatives with a range of liquidity and a range of risk profiles.

CHRIS HYZY: That's an important point to describe as it relates to you mentioned before 60/40, a rethinking. Not a complete overhaul, not a total adjustment, but a rethinking of what that means and who's it appropriate for, but you also touched on long-term goal planning whether it's through liability management, return matching. And now, let's touch a little bit on the risk side as well. Just in general, you described cash flow and yield and you described duration as relates to shorter duration to allow that reset to hit in certain assets. What about the hedge fund space? What do you want to leave clients and investors with to remember to think about the characteristics of hedge fund strategies and then perhaps private credit?

JON GRAY: So, what I would say on hedge fund strategies is what's nice in an environment like this is they have a downside protection orientation. There is hedging, which is helpful when volatility occurs. And also, what I like in the hedge fund space is a number of the big strategies are non-directional. So, a quant business hedge fund, a macro trader, many times, they can do things that are either non-directional or short markets in a way which offsets a lot of the exposure, an individual investor may have in stocks and bonds, which are quite exposed, obviously, to rising interest rates. So, I would look at hedge funds as a non-correlated way to get return, in many cases, particularly away from long-short equities, has some downside protection, and yet still has liquidity. And so, again, that can be part of this bucket as we move into this more volatile environment. And, definitely, it's the environment backdrop which you keep hitting on Chris, which is so important. And, the idea isn't that because rates are going up and inflation going up, you can’t invest, it's that where you invest has to change. And, that's really what this conversation is about.

CHRIS HYZY: That's a great segue to now touch on two areas that are often discussed, and it's mostly in aggregate. Private equity multiples are too high. The private markets have seen an influx of money. Infrastructure is still limited in supply. Take us through your thoughts there in general on the private equity backdrop, whether it's venture capital, the buyout space, and then ultimately infrastructure.

JON GRAY: So, what I would say is people always talk about private markets being they've gotten so large, private markets are in a bubble. What I like to remind people is I think the entire alternative space today is about $10 trillion. I think that's equal to about five companies on the West Coast of the United States in terms of their market cap. So, when you look at the size of the alternatives market, it's still relatively small to the overall investable universe of stocks and bonds. And, what we've seen, and this has been a concern for a long time in these different markets, is that as these markets have grown that somehow, they've outrun and they have too much money and they're forced buyers. But, the good news is in most of these structures, you have plenty of time to deploy the capital, particularly in these drawdown funds. You're not a forced buyer, nor are you a forced seller because you have the ability to hold the assets over time. As it relates to individual segments, the private equity market has shown over long periods of time sort of a durable premium in terms of return, which has happened because of picking great management teams, picking the right sectors, and being able to intervene in the companies and really great alignment with all the stakeholders in the businesses. And, that's been true at our firm. It's been true at a number of other firms. And, what's nice about a market dislocation like one we're in today is that prices go down, right? So, you get to buy really good businesses at attractive prices. I've talked about sort of the baby getting thrown out with the bathwater. When that happens, really good companies can get cast aside. That's a great opportunity for private equity to step in. As it relates to infrastructure, that's an asset class that I think is still early days. It's more advanced, frankly, in Australia and Canada and Europe. We're beginning for to grow here in the United States. But, it's the kind of assets you want to own. You want to own transportation infrastructure because you have pricing that is generally short duration in nature, and you own hard assets, you own roads, airports, railroads, you don't have a lot of input cost exposure. You might own digital infrastructure, which are data centers, cell towers, fiber to the home. Again, businesses that have strong tailwinds and pricing power associated, or energy infrastructure. You might own LNG or pipelines. Again, businesses well-positioned in this kind of environment. I think in infrastructure, that's a business. We've grown our business now to be quite substantial. I think there's a lot of opportunity. I think investors, again, are going to be seeking those kinds of hard assets in this environment. Credit we touched on. I liked the credit market, because having vehicles that lend directly to borrowers without necessarily it being distributed widely allows that direct lending vehicle, I think, to have a cost-competitive position, and it gives certainty to borrowers. So, if a private BDC is able to go to a borrower and say, here's your fund certain, we're in a volatile environment, I'm not distributing this, I'm in the storage business, that's a favorable place to be. And, the spreads in the private market. If you compare, for instance, leveraged loans versus high yield, the spreads are wider even though they're more senior in the capital structure. Because again, there's an illiquidity premium, which is what we're talking about here. And, I would just say, if you look across the landscape, to the extent you can allocate capital to the right managers, getting exposure is so important. So, yes, you want to pick best-in-class manager, managers, fortunately, you and your team, Chris, Nancy's team do an amazing job identifying best-in-class managers. I think if you have great managers, the right structures, I think the ability to produce favorable returns exists, particularly in the environment we're heading into.

CHRIS HYZY: So, that's a great segue over to a little bit of the risk side of the equation, what considerations we should make there. But, before we do that, just touch on quickly return expectations. As stock and bond market returns potentially could get muted given this new environment we're coming in from very high multiples on both, what type of return expectations do you foresee for the alternative class?

JON GRAY: So, I think it varies on the structures. I think in the drawdown higher return targeting structures, I still think what the industry would say, and what we would target our sort of mid-teens net returns, obviously, that's in longer duration drawdown funds. That's what those structures have historically delivered. I believe they can in the future. I think as you move towards these perpetual structures and you have liquidity, you have more current yield, then I think the total return target something in the high single digits. Now, the actual performance has certainly exceeded that, but we're moving in, obviously, into a harder environment. And there, depending on if it's credit, virtually all of that comes on a current basis. If it's real estate, it's probably a mix of more half and half current income and appreciation, but your dollars are in the ground the entire time. And so, I think you want to be realistic about the kind of returns you can produce. This will be a more challenging environment. It's not going to be as good as what we experienced in the last few years. But again, I think if you pick the right asset classes, the right managers, I think you can still do quite well.

CHRIS HYZY: Great point. Realism, discipline, selection, all very important. It doesn't matter what kind of investment it is. And also, performance is not guaranteed. We know that. So, quickly, before transitioning to risks, what type of alternative investment strategy could be most appealing to those looking for capital appreciation, for those looking for yield?

JON GRAY: So, on the capital appreciation side, I would definitely say the longer-term drawdown structures, things like private equity, real estate private equity, growth strategies, those type of funds, some of the secondary strategies, I think those things are designed to deliver capital appreciation over time. Compounding money in the ground, longer duration strategies, less liquidity associated with that, but you're trying to produce those higher returns. Very equity-oriented strategies. That's where you're going to have more chance at greater appreciation. As you think about income, that certainly on the furthest side would take you to more credit-oriented structures because there, you're going to get virtually all of your return on a current basis. In between would be more real estate assets that are yield-oriented and maybe some infrastructure assets. Again, what you're going for there is a mix of capital appreciation and income. And so, you can get a little bit of both. And, I would say these things over here tend to be more in our perpetual structures or the industries' perpetual structures. These tend to be more in these longer-duration drawdowns. And, what we've seen with big institutions, Chris, is they don't do all of one or all of another, they tend to have a broader approach, a portfolio approach. And, that would be my recommendation to individual investors, which is I'm going to take a portion, I'm going to seek these higher returns, I'm going to have less liquidity, but I want some of this over here with a little more current income, a little more liquidity associated with it. And then, oh, by the way, the bulk of my assets, I'm still going to do in liquid markets. So, we're not talking here about moving 80% of your portfolio to alternatives, but if individual investors today are 1% and institutions are at 30-plus, they're somewhere on that continuum, I think makes sense for individual investors. And, I personally would recommend a mix of those strategies.

CHRIS HYZY: And, that's where our chief investment office asset allocation models are. They're in that range, particularly in the midpoint of what you just described, on a balanced basis for the appropriate investors that are out there. I want to talk a little bit about some of the considerations on risk that are out there. Now, risk doesn't always have to be the big dark cloud, but like you said before, we should be conscious of the risks that are out there, which is another reason why you use capital discipline, capital allocation, vintage year diversification in specific alternatives. So, can you talk to us a little bit about two or three top risks that we should all consider?

JON GRAY: Well, I definitely think you hit on an important one, which is vintage year. One of the nice thing institutions like allocating to these more traditional drawdown structures is you make a commitment to a fund, but the capital is deployed over three to five years. So, they get a range of economic environments and entry points. And so, I think that is a risk putting all your capital in at one time. I think other risks obviously are less liquidity. So, a stock and bond, every day you could sell those. When you get to the drawdown funds as I've noted, that's longer-term locked up capital. But, for most very affluent investors or many, they don't need large portions of their capital and they're looking for longer- term capital appreciation. So, designating some portion of the portfolio as my truly illiquid I think makes a lot of sense. Obviously, us here at Blackstone, we eat our own cooking, we invest in our funds. So, we do a bunch of this over here. And then, in those perpetual vehicles, you get something that is more akin to the liquidity, let's say of the liquid markets, but still less liquid but in between, not with the longer-term drawdown funds. And again, you're taking a little bit less liquidity, you have strategies there that are more current income-oriented, so by its nature tends to be lower risk, but again, less appreciation potential. I think the most important thing though is back to manager selection. Are you picking the right managers? Have they been through good times and bad times? Are they going to create a portfolio and be a great steward of capital and be thoughtful in the environment? And, I think you want some diversification. You don't want to put all of your eggs into the private equity basket, or into the private credit, or into the private real estate. If we go back to the institutions, the best institutions, you can look at where they deploy their capital. So, in alternatives, they created diversified basket by geography. They'll create diversified baskets by asset class and then they'll do it by vintage year. So, you can go into drawdown funds that will allocate over time. You can allocate some capital to one of these perpetual vehicles today. Wait a year and so forth. So, you want to diversify by time, by geography, by asset class, and you build an alternatives portfolio that I think can be highly complementary to your more liquid portfolio and deliver what it's done for institutions less volatility and higher returns.

CHRIS HYZY: So, to put a big summary out there, we talked about manager selection critical. We talked about understanding liquidity. We talked about time horizon. We also talked about diversification, not just at one time, but over time, and we talked a lot about making sure that we understand not just where the opportunity set is but where the risks are. And, when we think about that, that is a rethinking of the portfolio strategy that has worked over the last 10 to 15 years. And, this new cycle, new thinking needs to get much greater attention in the future. So, Jon, I want to thank you for your time today. As always, it's been a great discussion going from the macro down into the entire alternative investment set. We appreciate the partnership and thanks as always.

JON GRAY: Chris, thank you. I just want to thank everybody in Merrill, Bank of America, amazing partners to our firm. We really appreciate the support. Thanks for your time.

CHRIS HYZY: And, thank you all for joining Nancy and me for this program on alternative investments. We hope you'll continue this conversation with your advisor. They are a great resource for helping you understand how the ideas discussed on this program fit into your own planning and can help answer any questions we didn't cover today. Thanks again for listening.

Important disclosures

The views and opinions expressed are those of the speakers as of the date of this webcast and are subject to change.

Webcast was recorded on 4/27/2022

Jonathan Gray and Blackstone are not affiliated with Bank of America Corporation.

All statements in this presentation regarding alternative investment funds (the “funds”) are qualified in their entirety by reference to the confidential private placement memorandum (the “PPM”) of the funds. Please carefully read the confidential PPM for additional information pertaining to the funds.  

Alternative investments are speculative and involve a high degree of risk.

Alternative investments are intended for qualified investors only. Alternative Investments such as derivatives, hedge funds, private equity funds, and funds of funds can result in higher return potential but also higher loss potential. Changes in economic conditions or other circumstances may adversely affect your investments. Before you invest in alternative investments, you should consider your overall financial situation, how much money you have to invest, your need for liquidity, and your tolerance for risk.

Investing involves risk, including the possible loss of principal. Past performance is no guarantee of future results.

Bank of America, Merrill, their affiliates, and advisors do not provide legal, tax, or accounting advice. Clients should consult their legal and/or tax advisors before making any financial decisions.

This information should not be construed as investment advice and is subject to change. It is provided for informational purposes only and is not intended to be either a specific offer by Bank of America, Merrill or any affiliate to sell or provide, or a specific invitation for a consumer to apply for, any particular retail financial product or service that may be available.

The Chief Investment Office (CIO) provides thought leadership on wealth management, investment strategy and global markets; portfolio management solutions; due diligence; and solutions oversight and data analytics. CIO viewpoints are developed for Bank of America Private Bank, a division of Bank of America, N.A., (“Bank of America”) and Merrill Lynch, Pierce, Fenner & Smith Incorporated (“MLPF&S” or “Merrill”), a registered broker-dealer, registered investment adviser and a wholly owned subsidiary of Bank of America Corporation (“BofA Corp.”).

Asset allocation and diversification do not ensure a profit or protect against loss in declining markets.

Nonfinancial assets, such as closely-held businesses, real estate, fine art, oil, gas and mineral properties, and timber, farm and ranch land, are complex in nature and involve risks including total loss of value. Special risk considerations include natural events (for example, earthquakes or fires), complex tax considerations, and lack of liquidity. Nonfinancial assets are not in the best interest of all investors. Always consult with your independent attorney, tax advisor, investment manager, and insurance agent for final recommendations and before changing or implementing any financial, tax, or estate planning strategy.

Non-Traditional Mutual Funds (“NTMFs”) are mutual funds and exchange-traded funds that are classified as alternative investments because their principal investment strategies utilize alternative investment strategies or provide for alternative asset exposure as the means to meet their investment objectives. Though the portfolio holdings of NTMFs are generally made up of stocks and bonds, NTMFs may also hold other asset classes and may use short selling, leverage and derivatives. While the strategies employed by NTMFs are often used by hedge funds and other alternative investment vehicles, unlike hedge funds, NTMFs are registered with the SEC and thus subject to a more structured regulatory regime and offer lower initial and subsequent investment minimums, along with daily pricing and liquidity. While these investment vehicles can offer diversification within a relatively liquid and accessible structure, it is absolutely essential to understand that because of this structure, NTMFs may not have the same type of non-market returns as other investments classified as alternative investments (such as hedge funds) and thus may serve as an imperfect substitute for such other investment vehicles. The risk characteristics of NTMFs can be similar to those generally associated with traditional alternative investment products (such as hedge funds). No assurance can be given that the investment objectives of any particular alternative investment will be achieved. Like any investment, an investor can lose all or a substantial amount of his or her investment. In addition to the foregoing risks, each alternative investment vehicle is subject to its own varying degrees of strategy specific or other risks. Whether a particular investment meets the investment objectives and risk parameters of any particular client must be determined case by case. You must carefully review the prospectus or offering materials for any particular fund/pooled vehicle and consider your ability to bear these risks before any decision to invest.

Merrill Lynch, Pierce, Fenner & Smith Incorporated (also referred to as “MLPF&S” or “Merrill”) makes available certain investment products sponsored, managed, distributed, or provided by companies that are affiliates of Bank of America Corporation (“BofA Corp.”). MLPF&S is a registered broker-dealer, registered investment adviser, Member SIPC and a wholly owned subsidiary of BofA Corp.

Merrill Private Wealth Management is a division of MLPF&S that offers a broad array of personalized wealth management products and services. Both brokerage and investment advisory services (including financial planning) are offered by the Private Wealth Advisors through MLPF&S. The nature and degree of advice and assistance provided, the fees charged, and client rights and Merrill’s obligations will differ among these services. Investments involve risk, including the possible loss of principal investment.

The banking, credit and trust services sold by the Private Wealth Advisors are offered by licensed banks and trust companies, including Bank of America, N.A., Member FDIC and other affiliated banks.

Trust and fiduciary services are provided by Bank of America, N.A., Member FDIC and a wholly owned subsidiary of Bank of America Corporation (“BofA Corp.”).

Investment products:

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