Market Musings 180223:
All About Alternatives
Explore the attractions of alternative assets in a diversified portfolio
Summary
Alternative assets can be a useful way for investors to generate returns and diversify away from stocks, bonds and real estate.
There are a number of benefits, but also pitfalls from investing in these alternatives
Alternative asset classes perhaps worth considering today include LBO private equity funds, infrastructure funds and both trend-following and merger arbitrage hedge funds strategies.
Podcast
How abruptly will world growth and inflation slow down?
Our senior strategists provide a round-up of macro-economic news and give their outlook for 2023.
They consider different regions of the world and discuss which asset classes they favour at present. Don’t miss this golden opportunity to catch up with macro news and listen to our strategists’ views to help you navigate the year ahead.
What are Alternative Assets?
Alternative asset classes are a set of alternative investments to consider in addition to the traditional asset classes of stocks, bonds, real estate and cash.
These include:
Commodities
Private equity
Private debt
Infrastructure funds
Hedge funds - especially trend-following strategies
Specialist strategies - investing in farmland, forests, art, insurance policies, litigation finance etc.
What benefits for investors from Alternative Assets?
Capturing the liquidity premium: assets that are illiquid - i.e. not easy to buy and sell quickly and at low transaction costs - should provide a higher long-term return to investors, to compensate them for this lack of liquidity.
In general, the more illiquid the investment, the greater the liquidity premium that will be required to make it attractive alongside other, more liquid assets.
Private equity is a classic case of an illiquid asset class that has relatively high transaction fees, cannot be bought and sold with the same ease and at the same low transaction costs as listed shares, but which over time has generated superior long-term returns to patient investors.
US Private Equity Funds averaged 11% CAGR from mid-2000 to mid-2021
Source: CAIA, Cliffwater
Alternative asset classes are also included in investor portfolios for reasons of diversification -i.e. a zero or negative correlation with stocks and corporate bonds, helping to thus…
