What are alternatives?

Alternative Investments

Broadly there are two types. Firstly, unlisted assets such as private equity, private credit, infrastructure and unlisted real estate. These are more complex and less frequently traded than equities and bonds.

The second type, hedge funds, are often referred to as liquid alternatives, and often invest in public markets, employing tools such as short-selling, derivatives and leverage.

Private equity represents investments in different stages across a company life cycle, from early-stage venture capital to later-stage growth equity and late-stage buy-out transactions.

Types of private equity exposure 

PE fund of funds

• Pools capital to invest in several other direct private equity funds and co-investments.
• Potential benefits: Greatest diversification of all private equity exposures, and smaller investment requirements.
• Considerations: Potential for over-diversification and limited contact with GPs of underlying funds. This can be mitigated by delegating control to an experienced PE manager.

Direct PE fund

• Raised and managed by a private equity firm to invest in underlying companies.
• Potential benefits: Direct access to GPs, and the ability to diversify across GPs and strategies.
• Considerations: Investors are responsible for manager due diligence, and direct PE funds typically have high minimum investments.

Direct co-investment Fund

• Executes minority investments directly in companies alongside lead sponsors.
• Potential benefits: Greater diversification vs. a direct PE fund and potential for higher returns and fee savings.
• Considerations: Quality of the co-investment manager’s deal flow and transaction expertise of the manager.

There are many types of credit products across the public and private markets (including corporate bonds, bank loans and structured products) that lend across segments such as real estate, corporate, securitised, asset-backed, and infrastructure. Private Credit encompasses non-traditional investments relying on an illiquidity and complexity premium to help drive excess returns.

Types of credit strategies

Direct lending

Provides debt financing to high-quality, private companies with typically moderate illiquidity and income focus.

Opportunistic debt

Profits by allocating in a range of securities and markets wherever managers see greatest value. Opportunistic investments command a premium due to high complexity or illiquidity.

Special situations/distressed debt investing

Invests capital in the existing debt of a financially distressed company or asset, government or public entity.

Hedge funds often invest in public markets and have the flexibility to employ alternative trading techniques to manage overall exposure, such as “short-selling”. By deploying various financial instruments or market strategies, hedge funds seek to offset risks and provide downside protection.¹

Examples of hedge fund strategies

Long/short equity

This strategy focuses on buying and selling stocks based on fundamental valuations. An example strategy is “paired trades”. Post crisis regulation in the US favors large banks over small banks, so a long position in a large bank and a short position in a small bank results in a low/zero exposure to banks and a profit if the large bank outperforms and the small bank underperforms.

Event-driven

Event driven strategies, which can include special situations, opportunistic or other sub-strategies, look to capitalize on market inefficiencies arising from corporate events, such as announced mergers, acquisitions, spin-offs, carve-out, divestitures, new product lines.

Macroeconomic (macro)

Macro hedge funds seek to capitalize upon large shifts in economic, regulatory, political and geopolitical factors. They employ top-down analysis and often use derivatives such as forwards, swaps and options, frequently employing high levels of leverage. Macro trading strategies could be either discretionary or systematic or a combination of both.

Multi-strategy hedge funds

Apply various hedge fund strategies and implement diversification to smooth returns, reduce volatility, and decrease asset-class and single-strategy risks.

Real estate equity involves investing in physical properties or portfolios to generate returns through rental income and potential capital appreciation, spanning sectors such as office, industrial and retail etc. Real estate investing infrastructure is attractive due to the stability and predictability of the cashflow it can provide (relative to other asset classes) and long-term potential capital growth opportunities.

Examples of real estate equity

Core

• Characteristics: High-quality, income-producing properties in prime locations. Minimal development risk and low leverage. Long lease terms with highly rated corporates and institutions.
• Return Profile: Stable, predictable income with limited upside.
• Examples: Class A office buildings, fully leased retail centers and shopping malls.

Core Plus

• Characteristics: Moderate risk and potential for incremental improvements such as cosmetic upgrades and lease optimization.
• Return Profile: Balanced between income and modest growth.
• Examples: Well-located properties needing light renovations or tenant upgrades such as retirement and student housing and storage spaces.

Value add

• Characteristics: Properties requiring significant operational or physical improvements to unlock value.
• Return Profile: Higher returns driven by capital appreciation and improved cash flow post-renovation.
• Examples: Emerging sectors such as life sciences, data centres, specialty housing or even assets with low occupancy and needing major repositioning.

Opportunistic

• Characteristics: Typically using high levels of leverage and active asset management, often involving ground-up development or distressed assets.
• Return Profile: Returns primarily from capital appreciation; income stream is uncertain during the early stages.
• Examples: New construction projects, redevelopment of obsolete properties, distressed acquisitions.

Infrastructure equity refers to investments in physical assets or companies that deliver essential services to communities, which may include energy, transport, water & waste, digital & social infrastructure such as schools and hospitals. Infrastructure investments offer stable returns, inflation protection, diversification benefits and growth opportunities as they are lowly correlated to traditional asset classes, have revenue increments linked to inflation and offer contracted cash flows with highly rated counterparties.

Core

• Characteristics: Mature, operational assets with minimal development or operational risk.
• Return Profile: Primarily income-driven, low volatility.
• Examples: Regulated utilities (water, electricity), toll roads under long-term concession agreements.

Core Plus

• Characteristics: Operational assets with moderate growth potential through efficiency improvements or expansion.
• Return Profile: Balanced between income and modest capital appreciation.
• Examples: Airports, data centers, telecommunications towers.

Value Add

• Characteristics: Assets requiring significant development or operational transformation.
• Return Profile: Higher reliance on capital appreciation; often involves significant construction or market risk.
• Examples: Greenfield renewable energy projects, digital infrastructure platforms in emerging markets.