Frequent market volatility can be distressing for investors. Can private real estate act as a hedge?
Public markets are built on constant price discovery. Stocks and index funds fluctuate throughout every trading day, exposing investors to frequent drawdowns that can reduce an investor’s portfolio value—even in otherwise healthy market environments.
According to Reuters, the S&P 500 index experiences 10% declines roughly once every two years. One-third of these corrections later morphed into steeper 20%+ declines, or bear markets.1 For investors concentrated primarily in exchange-traded assets, this level of volatility can translate into ongoing exposure to systemic and sentiment-driven risk.
While publicly traded stocks and bonds remain a core allocation for many portfolios, accredited investors who rely exclusively on public markets may be overlooking opportunities to diversify and reduce volatility.
Decades of industry research suggest that income-producing assets—particularly attainable housing solutions and other essential-use property types—have historically demonstrated resilience during inflationary and uncertain market periods. This is why private real estate is often viewed as an inflation hedge, supported by both short-term rental contracts that periodically rise with inflation and long-term asset value appreciation.
Allocating to private real estate, such as DLP Capital-sponsored funds, is one potential way accredited investors can reduce reliance on daily market fluctuations and diversify into tangible assets with fundamentally different performance drivers.
The problem with correlation
Publicly traded real estate instruments, including exchange-traded Real Estate Investment Trusts (REITs), offer liquidity and accessibility. However, because they are traded on open exchanges, their prices are typically highly correlated with broader equity markets.2 As a result, public REITs tend to decline during market sell-offs—regardless of the performance of the underlying holdings.
By contrast, private real estate is not repriced daily based on market sentiment. Historically, its performance during inflationary or volatile periods has been driven by more property-level fundamentals such as occupancy, rent growth, operating costs, and supply-demand imbalances.
For accredited investors seeking to hedge against public market volatility, private real estate can play a meaningful role. Because these assets are not traded on an exchange, they are generally less exposed to short-term sentiment than publicly listed REITs.
Accredited investors allocating a portion of their portfolio to private real estate investment funds, such as the DLP Housing Fund and DLP Lending Fund, may establish a potential buffer against volatility and reduce overall risk exposure to broader market fluctuations.
Even within private real estate, the asset type matters
Not all private real estate investments hedge against volatility equally. A fund’s investment strategy, asset selection, and target rental base (i.e. working families) play an important role in how it performs across market cycles.
Private strategies that are overly exposed to luxury apartments catering to discretionary renters—households that rent by choice—may be more exposed to cyclical demand. During periods of economic stress, discretionary renters often tighten their budgets or downgrade to more affordable housing options, which can pressure occupancy, rent growth, and overall performance in higher asset classes.
Historically, demand for essential-use real estate—including attainable housing and income-oriented real estate credit—has been observed across a wide range of U.S. markets and economic cycles. This resilience reflects the non-discretionary nature of housing needs, rather than short-term market sentiment.
For this reason, an arguably better hedge against market downturns are private real estate funds that focus on recession-resistant housing options. Funds that target attainable workforce housing, like DLP Capital-sponsored funds, capture non-discretionary demand from moderate-income “renters by necessity.” When the economy softens, rental demand for attainable housing tends to remain strong, as households still need access to safe, affordable communities regardless of how the S&P 500 is performing.
For accredited investors, this stability in demand can potentially mean steady income across all market cycles. By intentionally allocating to private real estate funds that prioritize cash flow and offer monthly distributions, such as the DLP Preferred Credit Fund, investors may be able to generate cash flow without relying on the forced sale of publicly traded assets during market drawdowns.
While private real estate values may experience short-term declines during economic downturns, historical performance across multiple market cycles suggests these assets have often demonstrated the ability to stabilize and recover over a typical multi-year investment horizon.
Hedge against public market volatility with DLP Capital-sponsored funds. Learn more at a virtual or in-person event.