The US president is expected to sign an executive order that allows 401(k) plans to include alternative investments. This change will offer more options beyond just traditional stocks and bonds. Insiders say the goal is to diversify retirement portfolios and offer greater flexibility for saving for retirement.

Big Changes Coming

We view this executive order as a clear sign of a major shift in how capital is directed. U.S. 401(k) plans hold over $7.5 trillion, so even a small shift toward alternative investments could lead to a huge influx of money. This isn’t just talk; it marks the beginning of a multi-year adjustment in the market. The main winners will be large alternative asset managers ready to handle this new influx. It may be wise to consider call options on major publicly traded private equity firms as a way to invest in this trend. Their growing assets mean more management fees, likely resulting in long-term revenue increases. Bringing in retail money into less liquid assets will likely lead to greater market volatility over time. We believe that buying long-term options on the VIX is a smart move, as the market is not fully reflecting the potential upheaval this policy could bring. Historically, major market structure changes—like the portfolio insurance trend of the 1980s—often led to unexpected volatility spikes. This shift began when the Department of Labor issued guidelines in 2020 allowing private equity in retirement plans, though many were slow to adopt. The upcoming executive order from the previous administration is intended to speed up this process, encouraging plan sponsors who have been cautious due to fiduciary concerns. This suggests the impact may be felt sooner than expected.

Effects on Key Sectors

We should also expect effects in sectors favored by private equity, such as technology and healthcare. Derivative traders can take positions in options on related sector ETFs, as new capital is likely to boost prices across the board. This presents opportunities beyond just investing in the asset managers. While private equity has usually outperformed public markets, a recent analysis by PitchBook showed that in the year ending Q3 2023, the S&P 500 outperformed private equity returns. This gap raises concerns that an influx of new money may lead to chasing deals at high valuations, risking future market instability. We need to be ready for both the initial surge and the possibility of difficulties years down the line. Create your live VT Markets account and start trading now.

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