The case for real asset exposure
by Michael Ward of Hedgehog
Rising inflation and interest rates have brought the merits of real asset investing into focus and shone the spotlight on investment advice that has stood the test of time for almost 50 years. The traditional concept of a 60/40 portfolio is under attack, as both equities and bonds have fallen in tandem. For investors seeking protection during periods of rising interest rates, high inflation and high volatility, investments whose value is directly linked to hard, tangible assets offer a potential solution. Portfolios that include exposure to real assets may provide a range of benefits, including:
- Potential financial returns: exposure to real assets offers investors both a.) regular income and b.) strong risk-adjusted returns
- Portfolio benefits: real assets are traditionally less volatile than many other asset classes, while they also provide portfolio diversification and can serve as a potential inflation hedge
- Social and environmental benefits: real asset investment opportunities may allow individuals to prioritise positive outcomes for society and support the transition to a low-carbon economy
Barriers to entry are often too high for individuals to invest
Access to real asset investments has historically been the preserve of the elite, however. Real estate and infrastructure investments, for example, have traditionally required large upfront capital commitments in return for access. Long investment windows typically spanning more than five years serve as a further barrier to entry for those individuals seeking liquid investment opportunities.
The end result is an industry dynamic whereby owners of real assets rely on institutional investors for capital. In fact, over 90% of alternative asset funding is derived from institutional investors. These investors have, over the years, served as a reliable source of capital for asset owners; however, their funds come with strings attached, not least around flexibility, control and alignment.
Blockchain technology can support the democratisation of real assets
The interplay between blockchain technology and smart contracts will provide a technological foundation for companies to address the imbalance between individual and institutional access to real assets. Blockchain will play a key role in streamlining processes and securing transaction records, while smart contracts involve the digitalisation and codification of information traditionally stored in paper format, such as in legal documents. Together, they underpin the “tokenisation” of tangible assets.
Tokenisation technology could be a critical factor in not only fractionalising investments but also providing liquidity in traditionally illiquid asset classes. Tokenising real asset investment opportunities enables interests to be more readily divided across a larger number of investors, thereby reducing the upfront capital commitments that have been a key barrier to entry in the past. Furthermore, these interests could be securely traded and instantly settled on blockchain, providing a potential solution to the traditional buy-and-hold model associated with real asset investments.
Unlocking the mass affluent market
The mass affluent demographic collectively holds more than $80 trillion in investable assets. Amongst others, private equity firms are turning their attention to this market because, by 2025, investable assets for mass affluent investors are expected to surge past the $100 trillion mark.
In addition to growth in total investable assets, individual allocations to real assets are also expected to increase relative to other asset classes. Today, individual investors allocate less than 5% of their discretionary capital to real assets. The remainder of their portfolio is typically dedicated to stocks and bonds. Institutions, meanwhile, in some cases allocate up to 20% of their portfolios to real assets. The allocation gap reflects the access gap, and with the removal of barriers to entry, individual allocations to real assets ought to increase.
Today, individuals can easily get fractional exposure to Apple or Tesla shares via a plethora of stock trading platforms. Opportunities to browse fractional investments that provide exposure to tangible, real assets are limited, however. Hedgehog’s mission is to make it possible for eligible investors to access the benefits of exposure to real-world investments from anywhere.
To date, Hedgehog has built an app and launched three tokenised investment offerings within a year. The first token is scheduled to deliver a positive return to investors, less than a year after the tokens were issued, due to a refinancing event. The team tasked with delivering this product brings experience from the likes of modern, consumer-oriented apps including Monzo, Revolut and Robinhood.