With so many alternatives options available, Solomon Nevins, Senior Investment Manager at Architas, weighs up the options
The popularity of alternative investments has grown substantially over the years since the financial crisis. The record-breaking volatility equities experienced in the late 00's saw investors searching for opportunities outside the mainstream. This spurred the expansion of the alternatives sector, with a lot of new products launched promising investors a slice of something different to traditional asset classes. With markets now later in the cycle, interest rates on the road to normalising and the bull market of the last decade stuttering, alternatives are now in the limelight more than ever. But with so many different options available, which have the potential to be true diversifiers for investors? Here, we take a look at a few of the most popular types of alternatives, some key characteristics and important factors to consider when analysing different options.
This sector comprises a wide array of investments linked to tangible assets. These range from social infrastructure funds that invest in street lighting and schools, to specialist property funds that operate in areas such as primary healthcare facilities and large-scale logistics centres. Real assets tend to be typified by a long-term investment horizon with steady cash flows. Another important aspect is that many assets can provide protection from the corrosive effects of higher inflation, while others can guard against rising interest rates, to maintain the real value of the asset. Currently, rising rates combined with a decelerating global growth outlook are proving a headwind for many areas of fixed income that investors typically look towards to provide protection from volatile equity markets. Real assets are a potential alternative solution in this market environment.
This type of fund aims to provide a steady return regardless of whether financial markets are gaining or falling. They typically use a combination of more complex financial instruments, such as options and futures. While the prospect of consistent returns regardless of market
conditions is clearly attractive in periods of higher volatility, in practice returns across the sector have been mixed. Additionally, their complex nature and limited portfolio transparency can lead to periods of surprising performance. We have seen significant outflows from some of recent years' most popular funds on the back of this combination.
Funds in this space tend to invest directly in privately held businesses. They look to take controlling stakes in firms with strong growth potential, aiming to benefit as they scale up and increase turnover, before then going public. Some big names that have benefited from private equity funding include Uber, which currently has plans for an initial public offering (IPO). The private nature of these businesses can create opportunities for managers to identify mis-pricing. The more hands-on nature of this type of investing can result in value creation that may not be possible from owning publicly-listed stocks. However, private companies may be smaller and less diversified than public companies, so they have the potential to be more sensitive to an economic downturn.
Click here to learn more about the opportunities as well as the challenges involved in selecting alternative assets