2022 was one of the worst years for a 60/40 portfolio in the U.S.—with some even claiming this strategy is now “dead.”
Those who included alternative investments in their portfolios performed far better than their counterparts, and this shift to alternatives shows no signs of stopping.
Private debt is a growing alternative that can bring balance to your portfolio with passive, high-yielding income and diversified holdings.
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How is the investment environment evolving?
Traditional investment strategies are experiencing an evolution driven by:
- Changing market dynamics
- Economic conditions
- Technological advancements
- Shifting investor preferences
Traditional investment options are no longer the sole focus
Stocks, bonds, and real estate have long been staples in investor portfolios.
The 60/40 portfolio is a traditional asset allocation strategy used to balance risk and return.
The strategy, as many investors know, involves allocating 60% of the portfolio to stocks (equities) and 40% to bonds (fixed-income securities).
The allocation is based on historical data showing that a diversified portfolio consisting of a mix of stocks and bonds can provide a reasonable level of returns while mitigating overall portfolio risk.
This strategy hasn’t always been foolproof, but in the roughly 10 years before 2022, it was working fairly well.
Challenges investors are facing in traditional markets
The year 2022 witnessed one of the worst performances for the 60/40 portfolio.
Persistently low-interest rates compressed bond yields, resulting in a diminished income for fixed-income investors.
Meanwhile, stock market volatility remains a persistent concern for investors, especially during periods of economic uncertainty and geopolitical tensions similar to the 2020 COVID-19 pandemic.
These downturns have highlighted the vulnerability of traditional portfolios to market shocks—and revealed the need for alternative strategies.
The rise of alternative investment opportunities
In response to the challenges posed by traditional markets, investors are increasingly turning to alternative investment opportunities to diversify their portfolios and mitigate risk.
Alternative assets include:
- Private equity
- Hedge funds
- Real assets (such as commodities and infrastructure)
- Private debt
These assets have gained popularity for their potential to provide uncorrelated returns and portfolio resilience.
Understanding private debt
Private debt has become a compelling alternative investment option for investors who want to diversify their portfolios and generate stable, risk-adjusted returns.
Unlike traditional public debt, which includes bonds traded on public exchanges, private debt involves loans extended to private companies or individuals.
Private debt investments include:
- Direct lending
- Private credit funds
- Private mortgage real estate investment trusts (mREITs)
Private debt offers several potential advantages, including:
- Higher yields compared to traditional fixed-income securities
- Lower volatility
- Reduced correlation with public market fluctuations
And, in the case of private mREITs (Mortgage Real Estate Investment Trusts), investors can unlock the benefits of real estate investing without the hassle of property ownership.
Factors driving growth in private debt investments
As investors continue to navigate uncertain market conditions, private debt is increasingly being recognized as a valuable component of a diversified investment portfolio.
Let’s take a look at the factors driving growth in private debt investments.
Higher yields
Private debt investments generally come with a higher risk, which means there’s a higher reward for investors.
The higher yield compensates for the increased credit risks and illiquidity of private debt.
Private mREITs in particular offer higher dividend yields compared to traditional equity or fixed-income investments.
They typically invest in higher-yielding mortgage-backed securities (MBSs) or mortgage loans, which generate interest income from borrower payments.
Additionally, the owner or manager of a private debt fund plays a crucial role in determining the level of risk associated with the investment.
Marquee Capital Fund 1 limits investor exposure through our proven approach.
Investors in our fund can reap the rewards of both higher yields and lower risk.
Diversification
Private debt investments typically have a low correlation with publicly traded assets such as stocks and bonds.
This means that the performance of private debt often moves independently or differently from traditional public market investments.
As a result, including private debt in a portfolio can help reduce overall portfolio risk through diversification.
Risk management
The illiquidity of private debt serves as a risk management tool by mitigating short-term market fluctuations and volatility.
When investors are shielded from short-term market noise, they can focus on the long-term income generation and capital preservation objectives of their investment.
Additionally, a reputable and experienced manager such as Marquee conducts robust due diligence to assess a borrower’s creditworthiness and evaluate collateral.
Flexibility
Borrowers are increasingly seeking unique lending options to fit their needs.
Institutional lending organizations such as banks have to follow strict requirements that don’t allow borrowers to meet these needs—and they are often slow to close deals.
The demand for flexible financing is growing, and with it comes a greater opportunity to invest in private debt that taps into the range of offerings private lenders provide.
This flexible structure benefits both borrowers and investors, who can access higher returns while mitigating risks.
Steady income streams
Private debt provides a steady, passive, high-yielding fixed income that holds for the long term.
This predictable income is a valuable component of an investor’s overall income strategy, particularly for retirees or income-oriented investors.
Benefits of private mREITs
Private mREITs are growing in popularity due to the consistent income from regular dividend distributions.
Income is generated from the interest payments made by borrowers on the underlying mortgage loans held by the mREIT.
Investors enjoy these private mREIT benefits:
- Higher dividend yields
- A steady stream of income
- Diversified holdings
- Tax benefits
- Hedge against inflation
As with any investment, investors need to weigh the risks vs. benefits.
Private mREIT risks include credit risks, interest rate fluctuations, and prepayment risks—some of which are subject to the quality of the investment fund.
Invest in Marquee Capital Fund 1
You can start investing in private real estate debt with a private mREIT through Marquee Capital Fund 1, which is a mortgage fund made of quality real estate-secured loans.
The fund allows investors to passively invest in high-yielding secured notes through a range of underwritten mortgage products—with a preferred return of 8%.
Our fund is differentiated by our belief in forming deep-rooted connections with our investors and clients, and our commitment to the highest auditing standards.
We protect our investors through the following approach:
- Prudent underwriting
- Diversification via a pool of mortgage-backed securities
- Investing in a wide array of mortgage products
