As financial, political and technological landscapes evolve, another seismic shift is taking place. Investors are reallocating to strategies that invest in “hard assets with low obsolescence,” or HALO strategies.
In today’s market, obsolescence transcends traditional definitions of physical deterioration or functional redundancy (e.g., outdated factories, suburban malls). For investors, it now reflects technological, economic and capital-structure obsolescence.
Low-obsolescence assets include those tied to housing, logistics, transportation, essential services and necessity-based retail, where demand is driven by recurring, non-discretionary consumption. These sectors typically demonstrate a high degree of physical indispensability and are largely invulnerable to artificial intelligence-driven replacement.
Other key characteristics include a high cost of replacement, driven by inflation and labor constraints, such as a stabilized apartment building in a supply-constrained city or a last-mile warehouse near a major coastal port.
They also tend to demonstrate longevity, with cash flow that remains stable across market cycles, along with scarcity driven by location and zoning constraints. Ultimately, these assets are defined by real cash-flow linkage, with income underpinned by rents, usage fees and long-term contracts.
What’s Fueling the Rotation?
As AI ushers in a new technological revolution, investors are seeking capital preservation anchored in physical reality. Hard assets, which retain functional relevance as the future of everything else is called into question, are best positioned to attract capital, particularly those grounded in human needs, such as housing, goods, energy and data movement. This type of behavior is a key characteristic of early-stage cycle transitions.
Then there’s the inflation factor. Periods of high inflation have historically led to renewed interest in assets with built-in inflation linkage, such as rent resets and regulated tariffs. This was the case in the 1970s, when inflation surged to 12% to 15% and household portfolios shifted meaningfully out of equities and into real assets, according to National Bureau of Economic Research data.
More recently, commodities and real assets outperformed during the 2021-2023 inflation surge, while bonds declined sharply as yields rose. Part of the reason essential real estate proved to be relatively insulated is that its sectors are structurally underpinned by rent-driven income, which tends to rise with inflation, at least in the short term.
Where Is the Capital Coming From?
Credit has been the dominant alternative allocation since 2020, but the paradigm is shifting. While credit strategies will always serve an important role in portfolios, yield compression and covenant loosening have slightly reduced their attractiveness.
Borrower demand has remained strong, but an influx of capital into credit strategies has intensified competition among lenders. In response, lenders have loosened underwriting requirements and accepted lower interest rates for the same level of risk.
Heightened redemptions from business development companies are also emblematic of this stage of the cycle. BDCs are investment vehicles that lend to middle-market companies, typically through senior secured loans or a variety of other debt instruments.
While accelerated BDC redemptions could be viewed as a sign of risk aversion, that’s not always the case. In this rotation, they are more indicative of a growing investor appetite for real assets, where they can find predictable cash flow, less reliance on continuous capital market access, and valuations tied to tangible collateral.
This is consistent with early-cycle rotation, not a crisis. As late-cycle credit dynamics play out, HALO strategies are increasingly viewed as the next logical place to park capital, given favorable structural tailwinds.
Typical HALO Investments
HALO strategies typically invest in three primary areas: real estate, infrastructure and select operating businesses.
Real estate investments are made through vehicles such as net asset value real estate investment trusts, Delaware statutory trusts and closed-end funds focused on industrial, residential, data-linked uses and essential retail. Within retail, capital is typically deployed to service-oriented formats, such as grocery-anchored centers, where demand is resilient and less tied to discretionary spending cycles.
Infrastructure exposure is gained through energy transition assets, utilities, transportation and logistics platforms. Investments in select operating businesses include capital-intensive platforms with physical moats; networks that require scale, land or regulatory barriers; and businesses with long-dated contracts or quasi-regulated economics, such as waste management companies, equipment rental platforms or environmental services providers.
HALO strategies typically do not invest in assets primarily dependent on leverage arbitrage, those where pricing power relies on capital market sentiment, or short-duration yield vehicles.
In short, investors are rebalancing toward “owning things” again. As a result, there will likely be increased demand for real asset exposure, income strategies with hard-asset backing, and vehicles emphasizing durability over IRR optimization.
The Real Takeaway
It’s important to remember this does not mean investors are abandoning credit. Rather, credit is shifting from its recent role as a dominant allocation, which is natural as cycles change. Due to several factors, allocators are seeking a better balance between financial yield engines and real-economy ownership.
Historically, credit leads the core allocation preference early and mid-cycle, whereas real assets gain prominence as the cycle matures. At this juncture, that is exactly what we’re seeing: allocations to credit are moderating, while capital is beginning to rotate back into real estate and infrastructure. This is not risk-off behavior, but capital reweighting.
This is a story about a return to fundamentals. As technology accelerates disruption, credit cycles mature, and capital seeks permanence, investors are once again recognizing the advantages of assets with physical usefulness and long economic lives.