When stock market indices increase or decrease, individual stocks (also known as equities) often follow suit. After all, if an index reflects the greater market and thus supply and/or demand, an individual stock’s price can, in turn, also be impacted by greater supply and demand (or lack thereof).
Private credit investments on Percent, however, typically operate independently from the ups and downs of the equities market. Even in times when the equities market faces a bull run or a correction, investments on Percent may be unaffected by these movements. This is because private credit investments are uncorrelated assets and operate based on their own set of factors.
What are uncorrelated assets?
Uncorrelated assets are investments that change in price based in part on factors separate from that of traditional markets. Alternative investments (like those on Percent) change in price and value based on other factors instead, acting as an alternative to traditional investment vehicles.
For instance, if you were to invest in a parcel of property, the real estate market would be the driving factor in determining the current value of your investment. Though the real estate market could be impacted by traditional markets (and, sometimes, vice versa), it largely operates separately with its own ups and downs. If the greater stock market decreases in value, it does not necessarily mean the real estate market itself will follow suit.
Uncorrelated assets can see some impact from traditional markets. In recent months, cryptocurrencies — an alternative market on their own — have seen fluctuations in pricing based on the adoption and usage of certain tokens and blockchain technologies from traditional, publicly-traded companies and institutions. Such adoption increased demand and subsequently the value of certain cryptocurrencies.
Uncorrelated assets, however, typically remain and operate predominantly separate from traditional markets.
Why would anyone want to invest in uncorrelated assets?
Uncorrelated assets can often act as a hedge against any losses one’s portfolio might incur in traditional markets. Seeing as these assets are less likely to be impacted by a bear market or decrease in a stock’s value, they can help offset potential losses in those market conditions.
There is no guarantee that uncorrelated assets will keep their existing value or increase in value. Though uncorrelated from traditional markets, these assets carry their own set of risks. Investors can see the loss of some or all of their initial investment into these assets given certain conditions. Investors wanting to add these assets to their portfolio must understand the risks they carry prior to investing.
How would traditional markets impact Percent investments?
Private credit investments on Percent largely rely on the parties involved: the originator and the borrower (or borrowers). Should either party’s business see any impact from changes in traditional markets, it could have an impact on the value of their particular note or the borrower’s ability to pay the originator.
As with all investments, there are some risks associated with investing in private credit on Percent. To mitigate these risks, our best-in-class Risk and Capital Markets teams do extensive due diligence on all parties involved in the investments featured on Percent, as well as highlight the risks each investment carries on individual opportunities pages on the Percent platform.
This allows for Percent investors to make an informed and educated decision when investing by seeing just how uncorrelated these assets are from traditional markets.