The challenges faced by traditional investments such as stocks and shares, owing to economic volatility in 2022, can at first glance be seen as the primary catalyst for investors to look further afield, but demand for alternative investments has been growing for years.
According to Simon Doherty, head of managed portfolio services at Quilter Cheviot, investors have sought to diversify their portfolios in an effort to generate higher risk-adjusted returns, while gaining access to opportunities not typically available through public markets.
Doherty adds: “With fewer listed companies available to choose from – numbers having declined significantly over the past few decades – broadening exposure to real assets and alternative investment strategies has been seen as not just preferable, but necessary.
“Product development and growing regulatory and technological support has been accelerating to meet this need.”
Alternative investments have also become more accessible through the increased availability of structures, such as investment trusts and open-ended investment companies (Oeics) that have an investment objective focused on alternative asset classes.
These can be accessed by IFAs, wealth managers and retail investors more broadly through platforms and as part of wrappers such as Isas and self-invested personal pensions.
Regulation has made things easier with the launch semi-liquid structures such as the long-term asset fund, which can invest in a wide range of underlying alternative asset funds.
Alternative investments and the private market can offer access to investment opportunities that are not typically available in traditional asset classes.
For instance, private market investors can gain access to the next generation of artificial intelligence companies, high-growth companies in Asia, and privately held small and mid-sized enterprises.
Additionally, private markets and alternative investments can provide access to strategies that are less correlated with traditional asset classes, such as insurance-linked investments, micro-finance, and market-neutral hedge fund strategies.
Nils Rode, chief investment officer at Schroders Capital, adds: “Therefore, private market and alternative investments can have a positive impact on portfolio diversification.
“Furthermore, private market investments can offer investors access to sustainable and impact-focused strategies. One example of this is investments in renewable energy infrastructure, such as wind or solar.”
The term ‘alternative investments’ is an umbrella term, and encompasses an incredibly broad range of assets and strategies that can be vastly different in their return profiles and the way that they behave in different market conditions.
Performance in high-inflation environment
So when it comes to how they perform in a high interest rate/inflation environment, it varies depending on the underlying asset.
For instance, in 2022 segments of the commodities market offered some of the very few ports in a storm for beleaguered multi-asset investors, Doherty notes.
Trend-following hedge fund strategies also provided the opportunity to generate positive returns, for instance through short positions in bonds.
“In contrast, real estate exposure was impacted by a combination of bond market movements, as higher yields equaled increased competition for capital from more liquid bond markets, and macro concerns,” Doherty adds.
