Alternatives – Will They Become a Future Core Allocation?

A question of risk versus return
We know that alternative investments are becoming increasingly popular with financial advisers and wealth managers, with seven in ten saying they have become essential for portfolio diversification (Natixis Professional Fund Buyers Survey 2018).

Alternative strategies have the potential to boost portfolio diversification, which can help to counteract the risk that poor performance by any single asset class or investment strategy might pose to a portfolio’s overall health. They are also designed to have a low correlation to stocks and bonds, so they move independently of how these assets might behave in other market conditions.

These characteristics ultimately result in a reduction of portfolio risk, dampening the negative effects of market volatility if and when it occurs. In addition, alternative strategies can also help amplify portfolio returns by providing investors with new sources of performance that can be generated often irrespectively of the broader market backdrop.

In short, alternative investments help to de-correlate and diversify portfolios while dampening the impact of volatility. And, given the bumpy investment landscape of 2019, it’s perhaps easy to see why most investors are planning to allocate more of their portfolios to alternatives in both the short and the long term.

No longer an exotic delicacy
There’s a diverse range of alternative strategies available across the risk-return spectrum. These strategies can employ a number of additional tools that can help improve diversification, risk management and potential returns – including short positions, leverage, relative value, illiquidity and complexity.

This means investors can really hone in on the strategy that best suits their portfolio from a risk, return and diversification perspective. As a result, while many of the liquid strategies – such as equity long-short or global macro – were considered an expensive and exotic delicacy for advisers not long ago, it is not necessarily the case today. Moreover, their increasing availability on platforms mean they’re easy to add to client portfolios.

As one of the world’s leading multi-affiliate asset managers, we offer a wide spectrum of liquid and illiquid strategies, spanning investment vehicles that can range from UCITS funds to managed accounts. And several of our affiliates run both traditional and alternative strategies.