Uncorrelated: why your wealth shouldn't rise and fall with tweets and tariffs

When public markets move in lockstep – triggered by tariffs and tweets – true diversification disappears. Venture capital offers a rare counterweight: uncorrelated returns driven by company fundamentals, not macro noise.

Markets now whipsaw on just about anything: CPI figures, shifts in China policy, and 2025's panic word: tariffs.

A whisper of inflation data or a single NVIDIA earnings beat can jolt entire indexes. The challenge isn't that investors are reactive. It's that seemingly diverse public assets have become increasingly correlated, responding to the same macro inputs regardless of individual company fundamentals.

The illusion of diversification

Most investors aren't taking wild bets here. They're holding sensible positions: large-cap tech, index funds, blue-chip names. These are rational choices backed by solid fundamentals and consistent performance over time.

But here's what's changed: these assets increasingly move in unison. Whether you hold the "Magnificent Seven" or a balanced ETF, you're exposed to the same macro levers: interest rates, sentiment, fiscal policy. When volatility strikes, correlation spikes across the board.

True diversification isn't about owning different logos. It's about owning genuinely uncorrelated outcomes.

Where venture capital fits

This is where VC plays an interesting role, not as a replacement for public markets, but as a complement with fundamentally different drivers.

VC returns aren't dictated by headlines or monetary policy because most startups are pre-revenue, pre-profit, and pre-market. Performance depends on company-specific variables like founding team quality, execution capability, product-market fit, and category timing. These inputs don't move with the ASX or Nasdaq.

Now, let's be clear about what this means. VC isn't less risky than public markets. Individual startups fail at high rates, and the asset class requires patience, illiquidity tolerance, and sophisticated due diligence. But the risk profile is different.

It's company-specific rather than systematic, and professional VC funds mitigate individual company risk through portfolio diversification across dozens of investments.

Two types of hedge

There are two hedges worth considering:

A hedge against market correlation because startups aren't affected by daily market sentiment. They don't trade, don't report quarterly earnings, and operate largely insulated from macro volatility that drives public market movements.

A hedge against incumbent disruption because those startups often represent the forces reshaping established industries. Fintechs challenging traditional banking, SaaS tools replacing legacy IT infrastructure, direct-to-consumer brands outcompeting established retailers.

This isn't about picking winners and losers. It's about acknowledging that innovation often comes from outside the established order.

What the data shows

Asset Class Venture Capital Private Equity Real Estate Public Equity High-Yield Bonds Core Bonds
Venture Capital 1.00 0.71 0.69 -0.06 -0.13 -0.13

The correlation data tells an interesting story. VC is one of the few asset classes showing negative correlation with both public stocks and bonds. When traditional markets zig, venture often zags, though this comes with its own set of trade-offs around liquidity and individual company risk.

The private market shift

The numbers support a broader structural change. There are now 40% fewer public companies than in 2002, as businesses choose to stay private longer, accessing growth capital without the quarterly reporting cycle and regulatory overhead of public markets.

“These broad trends demonstrate the rapid tilt towards private capital markets. Of all subsectors, venture capital has seen the largest annual growth since 2012. – Ryan Burke, Global Private Leader at EY

This doesn't make private markets "better" than public ones. It makes them different, with distinct risk-return profiles and correlation characteristics.

The Australian context

For Australian investors, venture capital comes with meaningful tax advantages. Through ESVCLP structures, eligible investors receive a 10% tax offset and pay no capital gains tax on qualifying investments.

These incentives aren’t available in other asset classes, making VC a valuable addition to a diversified portfolio – especially for those looking to allocate earlier in the growth cycle.

Portfolio context matters

None of this suggests abandoning public markets. Liquid, transparent, regulated exchanges serve essential functions in any sophisticated portfolio. But in an environment where traditional diversification has become more challenging, understanding different correlation patterns becomes more valuable.

Public markets offer liquidity and transparency. Venture offers asymmetry and non-correlation. The question isn't which is better. It's how they might work together in a world where correlation risk has quietly become more concentrated.

Your wealth doesn't have to rise and fall with political headlines. But achieving genuine diversification requires looking beyond traditional asset allocation frameworks to understand how different investments actually behave in practice.

Disclaimer

This article is for informational purposes only and does not constitute financial advice or an offer to invest. Investments in venture capital carry significant risks and are suitable only for sophisticated investors. For more information, please request our Information Memorandum. This offer is not available to retail investors.

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