Building portfolios with alternatives

We believe a complex and rapidly changing world demands a new approach to portfolio construction. Portfolios which are built to be resilient, to withstand uncertainty, and with client outcomes at their heart.

With an expanding universe at your disposal investors are able to shift their attention towards greater indexing and a search for true alpha and alternatives.

Now more than ever, we believe alternatives have a core, strategic role to play in building better portfolios for the future.

Capital is at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. You may not get back the amount originally invested. Alternatives investments may have low liquidity which often causes the value of these investments to be less predictable. In extreme cases, they may not be able to realise the investment at the latest market price or at a price considered fair.

Read more on our approach to portfolio construction

How are European investors 
allocating to alternatives?

Our analysis of 600 European portfolios looks at the ways investors are using alternatives as a core strategic asset class.

22% average allocation

Alternatives remain favoured by asset allocators as market volatility continues.

43% in hedge funds

The majority of alternatives allocation came from hedge funds, particularly fundamental long/short strategies.

Asset allocation does not always equal risk allocation

In the sample of portfolios reviewed, while average allocation to alternatives was significant, their risk contribution was low, driving 2% of total portfolio risk on average over a one year period.

Demonstrating the potential effectiveness of alternatives as a portfolio diversification tool.

For illustrative purposes only.

Source: BPAS, portfolios received from January 2018 – December 2018. 

Enhancing income
Many European investors are using liquid alternative strategies to diversify from traditional fixed income in search for yield.
Dollar Tag

Source: BlackRock Portfolio Analysis and Solutions (BPAS), portfolios received from January to December 2018.

Read the full asset allocation and trends report

The role of alternatives
in portfolios


Alternatives exploit a unique set of alternative risk premia, in order to provide idiosyncratic sources of uncorrelated returns.

Improved risk and reward profile

Modern portfolio theory shows that adding diversified return streams to an investment portfolio can improve risk-adjusted returns. An allocation to alternatives could offer a powerful tool in construction and creating a more resilient portfolio.

Downside management

Alternative drawdowns have been shorter and shallower than those seen in equity markets. At times of systemic risk, alternatives have lost less money than long-only funds, delivering superior tail-risk protection over time*.

*BlackRock, Bloomberg. HFRI Fund Weighted Composite Index from January 1994 to December 2018.

Risk: Diversification and asset allocation may not fully protect you from market risk.
Risk: Risk management cannot fully eliminate the risk of investment loss.

A dynamic and
diversified approach

Liquid alternative strategies can be effective diversifiers and return enhancers during market downturns, but strategies can differ vastly from one another.

The right tools

Investing in dynamic and multi-liquid alternative strategies can present challenges and we encourage clients to use sophisticated multi-asset risk management platforms, such as Aladdin®, or be assisted by specialist third-party teams to allocate to the most suitable investments. This type of risk management solutions can provide an effective start to building a core and resilient addition to the total portfolio.

Risk: While proprietary technology platforms may help manage risk, risk cannot be eliminated. 

BlackRock liquid focus funds

BlackRock UK Emerging Companies Absolute Return Fund
BlackRock UK Emerging Companies Absolute Return Fund
BlackRock European Absolute Alpha Fund
BlackRock European Absolute Alpha Fund
BlackRock Global Event Driven Fund
BlackRock Global Event Driven Fund

BlackRock’s competitive edge

BlackRock has a robust history of alternative investment innovation and has proven experience and skill in managing alternative solutions. Source: BlackRock, May 2019
All amounts given in USD
years’ experience across asset class, style and geography
client assets in alternatives
investment professionals with deep expertise across asset class
sector and regional investment teams
independent risk professionals