A First Foundation Blog

A Piece of the Puzzle – May 2024

| 5/13/24 7:42 AM

Welcome to the second installment of our brand new series, "A Piece of the Puzzle," where we pause to share our insights on what we can anticipate in the markets and the economy for the upcoming month.

In today’s article, we’ll first discuss how the U.S. economy has progressed during the first four months of the year and how this plays into interest rate expectations for the remaining eight months.

Afterward, we’ll discuss the potential benefits and factors to consider when adding Alternative Assets to a traditional portfolio of stocks and bonds.

Interest Rates: Are They Likely To Remain Higher for Longer?

After 18 months of Federal Funds Rate (FFR) increases during 2022 and 2023, resulting in an increase of the target rate from essentially zero to a target range of 5.25%-5.50%, it’s no wonder that the chatter at the beginning of this year for the direction of the FFR in 2024 is how many rate cuts the Federal Reserve would announce this year (emphasis on plural), and not whether we would see any at all.


Chart 1

Source: Board of Governors of the U.S. Federal Reserve System – Data is from 1/1/2022 through 1/1/2024.


Now consider some metrics seen since the beginning of the year. These are sending conflicting messages about the state of the economy, thus complicating the Federal Reserve’s decision making:

  • Inflation continues to remain significantly elevated, with the (latest) March Consumer Price Index headline reading at 3.5% year-over-year. Excluding the volatile Food and Energy categories yields an even higher reading of 3.8% year-over-year. A leading culprit in this elevated inflation is in Transportation costs, led by Auto Insurance. Such stubborn inflation readings provide support for the Federal Reserve to keep rates higher for longer.

Chart 2

Chart 3

Source: U.S. Bureau of Labor Statistics – Data represents year-over-year inflation for March 2024.


  • Employment continues to be strong, although moderating, with the (latest) Bureau of Labor Statistics "Employment Situation" report1 ticking up to 3.9%. New jobs have also moderated, falling below 200K for the first time since December last year. With a softening employment situation, the Federal Reserve may view this as evidence weighing in favor of cutting rates sooner rather than later.

Chart 4

Source: Bureau of Labor Statistics

  • Bond yields have continued to rise, with the U.S. Treasury yield curve showing significant flattening since the beginning of the year. For instance, the Federal Reserve’s preferred metric when evaluating the shape of the yield curve – the difference between the 3-month yield and the 10-year yield – was 156 basis points at the end of 2023 but has declined to only 77 basis points as of the end of April. When the yield curve was in a steeper inversion, there was more evidence weighing in favor of lowering rates, but now with a less steep inversion, the Federal Reserve may be more inclined to keep rates higher for longer.

Chart 5


But perhaps the best indicator of what the Federal Reserve may do is the Fed’s very own words – or more precisely – evolution of their own words. Below are excerpts from Federal Reserve statements after each of the Fed meetings going back to the final meeting of 2023. In the 2024 statements, I highlight in green statements which might indicate a higher probability of rate cuts while highlighting in red statements which might indicate a lower probability of rate cuts:

12/13/23: “Recent indicators suggest that growth of economic activity has slowed from its strong pace in the third quarter. Job gains have moderated since earlier in the year but remain strong, and the unemployment rate has remained low. Inflation has eased over the past year but remains elevated. The U.S. banking system is sound and resilient. Tighter financial and credit conditions for households and businesses are likely to weigh on economic activity, hiring, and inflation. The extent of these effects remains uncertain. The Committee remains highly attentive to inflation risks.”

01/31/24: “Recent indicators suggest that economic activity has been expanding at a solid pace. Job gains have moderated since early last year but remain strong, and the unemployment rate has remained low. Inflation has eased over the past year but remains elevated. The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. The Committee judges that the risks to achieving its employment and inflation goals are moving into better balance. The economic outlook is uncertain, and the Committee remains highly attentive to inflation risks.”

03/20/24: “Recent indicators suggest that economic activity has continued to expand at a solid pace. Job gains have remained strong, and the unemployment rate has remained low. Inflation has eased over the past year but remains elevated. In recent months, there has been a lack of further progress toward the Committee's 2 percent inflation objective. The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. The Committee judges that the risks to achieving its employment and inflation goals have moved toward better balance over the past year. The economic outlook is uncertain, and the Committee remains highly attentive to inflation risks.”

05/01/24: “Recent indicators suggest that economic activity has continued to expand at a solid pace. Job gains have remained strong, and the unemployment rate has remained low. Inflation has eased over the past year but remains elevated. In recent months, there has been a lack of further progress toward the Committee's 2 percent inflation objective.”

From the evolution of these statements, it is quite clear that the Federal Reserve is very concerned about inflation and has removed the more positive statements in January and March from appearing in its May statement. 

Bottom Line: At the beginning of the year, many market participants were predicting four or more rate cuts by the end of the year, but with the much more hawkish data seen during 2024’s first four months, such aggressive rate cuts seem much less likely to occur. In fact, about 2 in 3 participants see only one to two 25bp rate cuts, and some participants – about 1 in 10 – see no rate cuts at all2:

Chart 6

Source: CME Group (Fed Watch Tool) – Data is as of 5/3/2024

The Case for Alternative Assets Inside Portfolios

Most industry practitioners agree that prudent portfolio construction dictates that an asset allocation of diversified stocks and bonds form the bedrock of a long-term investment strategy3.

Being fiduciaries, most Registered Investment Advisors (RIAs) take this advice to heart. For instance, Advyzon, a Chicago-based company providing software to wealth managers, found that the vast majority of its RIA client firms’ assets are in Equities and Fixed Income, commonly referred to as Traditional Assets (“TA”)4.


Chart 7-1

Source: Advyzon


Notice that in the chart there is a small allocation to “Alternatives,” which is commonly called “Alternative Assets” (or “AA”). What exactly is AA? Put simply, AA are primarily investments that are not publicly-traded or securitized.

Having now defined Alternative Assets, a natural question then arises: Could the addition of AA to a TA-portfolio increase the risk-return profile when compared to a TA-only portfolio?

The evidence, both in theory and practice, suggests the following: The addition of Alternative Assets to an already well-diversified portfolio of Stocks and Bonds can improve risk-adjusted returns.

To illustrate, let’s examine historical evidence. In the chart below are six pie charts representing various asset allocations, three of which consist exclusively of TA (i.e., Equities and Bonds), and three of which have a “carveout” to AA (abbreviated in this chart as “Alts”)5.


Chart 9

Source: J.P. Morgan Asset Management – For illustrative purposes only. Past performance is no guarantee of future results.


As one can see, when AA are added to a portfolio consisting exclusively of TA, both the return (i.e., Annualized Return) increased while the risk (i.e., Volatility) decreased.

Explaining the reasons for this phenomena takes into account the following considerations. For ease of explanation, we consider those for return and risk separately:

  • Return Considerations: Because many Alternative Assets are more illiquid than Traditional Assets, they benefit from a so-called "illiquidity premium." Moreover, Alternative Assets, due to their often-private nature have more opportunities for active management than those of Traditional Assets.
  • Risk Considerations: Alternative Assets are often priced much less frequently than Traditional Assets are and by themselves have lower volatility. More importantly, however, is because the correlations – or how closely two assets move together in price – between Alternative and Traditional Assets are often low or even negative, there can be significant diversification benefits.

Why Alternative Assets Are Becoming Increasingly Important

Why have Alternative Assets gained such prominence in recent years? This is primarily due to the following:

Traditional Assets have their genesis in the Public Markets while Alternative Assets have their genesis in the Private Markets.

As such, it behooves us to take a look at why Private Assets have grown so significantly. We’ll examine the three primary Alternative Asset classes, Private Equity, Private Credit, and Private Real Estate, separately.

Private Equity: U.S. Companies are Staying Private For Longer

The number of publicly-listed companies surged during the bull market of the mid-to-late 1990’s, reaching a peak of over 8,000. After the bursting of the dot-com bubble in the early 2000’s, the number of companies sank precipitously, falling below the 5,000 level during the height of the Great Financial Crisis.


Chart 10

Source: J.P. Morgan Asset Management


Although the number of public companies has ticked up in recent years (averaging almost 6,000 in the last five calendar years), that number is still 25% below the peak figure achieved more than a quarter-century ago.

This result demonstrates a marked sea change in how new companies raise capital, especially those that eventually transition from private to public. Put simply, companies are staying private for longer and growing the value of their businesses, thus resulting in Initial Public Offering (IPO) sizing that has significantly increased:


Chart 11

Source: J.P. Morgan Asset Management


As shown in the following chart where performance historically has averaged in the mid-teens, investors who allocated capital to the equity of private companies garnered strong performance over long periods of time:

Chart 12

Source: J.P. Morgan Asset Management – Past performance is no guarantee of future results.


In summary, for those investors with a long time horizon seeking growth in capital appreciation, Private Equity can be an appealing asset class, especially when used as a diversifier to traditional Public Equities.

Private Credit: Companies Will Continue to Find It Difficult to Borrow from Traditional Channels

While raising equity capital from investors is important for any company, such capital is often not sufficient to pay for all of that company’s expenses and hence, credit is important to fill that gap.

Throughout most of the twentieth century, a majority of companies could borrow money either by direct lending through commercial banks or by syndication through investment banks. However, during this century’s first decade, due to increasing regulatory requirements, such lending and syndications to small-to-medium-size companies has declined and non-banking institutions (i.e., institutional investors & finance companies) gradually began to fill the void.


Chart 13

Source: J.P. Morgan Asset Management


This phenomena reached a crescendo right up until the beginning of the COVID-19 pandemic, when more than 9 in 10 companies accessing financing through non-bank channels.

Although traditional lending institutions have returned to fill some of the borrowing demand (about 1 in 4 loans last year) as the economy emerges from the pandemic, it is clear that Private Credit is here to stay.

This increasing role of non-banking institutions filling the credit needs of companies can be seen in the spectacular growth of Direct Lending, growing from virtually non-existent fifteen years ago to over $100 Billion in annual issuance during the last three years:


Chart 14

Source: J.P. Morgan Asset Management


To summarize, Private Credit fills a critical need for those small-to-medium size companies that have borrowing needs, and with their resulting high levels of interest payments, investors who desire significant levels of current income may be able to benefit from investing in this asset class.

Private Real Estate: A Huge Untapped Investment Combining Both Growth & Income

Behind the two behemoths of Stocks and Bonds, Real Estate is a huge asset class, with nearly $21 Trillion in investable assets:


Chart 15

Source: Blackstone – 1Securities Industry & Financial Markets Association, June 30, 2022. 2NAREIT, June 30, 2021. 3Wall Street Journal, as of December 31, 2022.


While many high-net-worth (HNW) investors do have some exposure to real estate in their portfolios, most access them through Publicly-traded REITs or REIT funds. The vast majority of Real Estate investments are in the Private sphere, which has largely been untapped by HNW investors:


Chart 16

Source: Blackstone – 1NAREIT, June 30, 2021, "Estimating the Size of the Commercial Real Estate Market." 2Hodes Weill & Associates and Cornell Baker Program in Real Estate, Cerrulli Associates, December 31, 2022.


Unlike Publicly-Traded REITs, which exhibit high volatility due to their being traded similarly to public Equities, Private Real Estate has significantly lower volatility, even lower than many safe U.S. Treasuries6:


Chart 17

Sources: Blackstone, Morningstar Direct, NCREIF, as of December 31, 2022.


Though there is not a guarantee it will continue, Private Real Estate, with its generation of current rental income, provided consistent yields with distributions exceeding 4% per annum 85% of the calendar years during the past two decades:


Chart 18

Source: NCREIF, 20-year period ending December 31, 2022.


Bottom Line: Private Real Estate is a huge asset class that can provide growth, income – as well as diversification – and depending on your investment objective should be considered for a core place in many Alternative Asset-oriented portfolios.

A Note of Caution: Alternative Assets Contain Unique Risks of which to be Cognizant

While Alternative Assets can have significant benefits when added to a portfolio of Traditional Assets, an investor needs to be aware of some of the risks that are unique to Alternatives:

  • Illiquidity:  As mentioned previously, Alternative Assets tend to be traded privately, rather than publicly, and as such, own assets that can be difficult to value and are generally less liquid.  Typically, Alternative Assets have liquidity ranging from monthly to a decade or more, so they may be difficult to liquidate without a loss of value if your circumstances should suddenly change.
  • Complexity: Alternative Assets are often more complex and their structure, terms and tax implications can be difficult for investors to understand so they may not be right for novice investors.  Consulting your Financial Advisor before investing is recommended.
  • Higher Fees and Minimums: Many Alternative Assets carry high minimum investment amounts and may not be available to all investors. In addition, Alternative Assets tend to carry higher management fees and may have  performance fees.  Private Alternative Assets are also not as heavily regulated and are not subject to the same reporting requirements that you find with mutual funds.

In closing, Alternative Assets were at one time only available to institutional and high-net-worth investors. Now Alternative Assets are much more available for individual investors to add to their investment portfolios. As with all investments, Alternative Assets come with both benefits and risks. Before considering Alternative Assets, seek the advice of a Financial Advisor with experience in Alternative Assets who can help you determine whether they are an appropriate addition to your investment portfolio. 


[2] The 12/18/2024 Federal Reserve meeting is the final one of the year.

[3] Some investors may elect to have a portfolio consisting of no stocks or no bonds, depending on their individual risk and return profiles.

[4] Data is as of 12/31/2022.

[5] The Alts portfolio includes hedge funds (Hedge Fund Research Institute), real estate (NSREIF index), and private equity (Burgiss), with each receiving an equal weight.

[6] U.S Treasury securities are generally considered to be free of default risk as the U.S. Government has never defaulted on its debt obligations.


Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by First Foundation Advisors), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from First Foundation Advisors. Please remember that if you are a First Foundation client, it remains your responsibility to advise First Foundation, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. First Foundation Advisors is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the First Foundation Advisors’ current written disclosure statement discussing our advisory services and fees is available for review upon request, or at  Please Note: First Foundation Advisors does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to First Foundation Advisors’ web site or incorporated herein, and takes no responsibility therefore. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly.

Mike Chen, CFA, CAIA,
About the Author
Mike Chen, CFA, CAIA,