What are alternative investments?
More and more investors are shifting to alternatives to boost returns, generate income, provide diversification from traditional investments and achieve their goals.
Broadly speaking, alternatives are investments in assets other than stocks, bonds and cash, or investments using strategies that go beyond traditional methods, such as long/short8 or arbitrage strategies.
There are two main types of Alternative investments. First are private assets such as private equity, private credit, infrastructure and private real estate. They are less frequently traded than public stocks and bonds, and give investors access to additional sources of return. Hedge funds, the second type, operate mainly in public markets but use less traditional tools such as short-selling and leverage.
Alternative investments have become an essential tool for advisors and investors alike. Significant growth in private assets, in particular, is making investing more complex.
What are the different types of alternative investments?
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Liquid alternatives4
Investments that aim to provide diversification and downside protection, available through more liquid vehicles such as mutual funds, UCITS5 and Cayman6, and ETFs7.
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A hedge fund is defined as a privately organized investment vehicle that uses its less regulated nature to generate investment opportunities that are substantially distinct from opportunities offered by traditional investment vehicles, which are subject to regulations such as those restricting their use of derivatives and leverage. Hedge fund strategies focus on idiosyncratic risk to generate absolute returns irrespective of the market environment.
Source: BlackRock, 31 December 2021
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While hedge funds strategies can be effective diversifiers and potential return enhancers, strategies can differ vastly from one another. Holding diversified exposures to multiple hedge funds strategies in the long term, whilst dynamically allocating to short-term opportunities that may present themselves in certain hedge fund strategies as we move across market cycles and regimes.
Source: BlackRock, 31 December 2021
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Discretionary and systematic approaches seeking to generate positive absolute returns through investments in a range of equity markets.
Source: BlackRock, 31 December 2021
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Strategies seeking to generate superior risk-adjusted returns by exploring a wide spectrum of transformative corporate events.
Source: BlackRock, 31 December 2021
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Relative value strategies seek to exploit temporary differences in prices of related securities.
Source: BlackRock, 31 December 2021
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Discretionary, dynamic long/short, multi-asset exposure in a daily liquidity absolute return structure.
Source: BlackRock, 31 December 2021
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Global multi-asset, long/short Style Advantage franchise offering, seeking attractive, diversified risk-adjusted returns with a low correlation to major equity and bond markets.
Source: BlackRock, 31 December 2021
Illiquid alternatives
Investments that are traded less frequently and/or with low volume, making it harder to observe returns. Given the difficulties of selling and valuing illiquid investments, many investors demand a risk premium. While some investors may avoid illiquid investments at all costs, others specifically increase their allocation to illiquid investments in order to earn this risk premium.
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The category of real assets focuses on investments in which the underlying assets involve direct ownership of nonfinancial assets. These assets are also known as physical assets that have value due to their substance and properties, such as real estate and infrastructure. Real estate focuses on land and improvements that are permanently affixed, like buildings. Infrastructure claims are on the income of toll roads, regulated utilities, ports, airports, and other real assets that are traditionally held and controlled by the public sector.
Source: BlackRock, 31 December 2021
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Private equity refers to equity and debt positions that, among other things, are not publicly traded. These investments primarily emerge from funding new ventures, known as venture capital; from the equity of leveraged buyouts (LBO) of existing businesses; from mezzanine financing of LBO’s or other venture; and from distressed debt resulting from the decline in the health of previously healthy firms. In private equity direct investments managers look to add value through operations.
Source: BlackRock, 31 December 2021
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Illiquid or non-core credit that offers a yield pickup over traditional investment grade credit due to illiquidity, credit worthiness or complexity. Cyclical and secular changes in credit markets drive investment opportunities. Private credit assets can provide investors diversification benefits, yield enhancement, and additional capital deployment opportunities relative to similar public assets.
Source: BlackRock, 31 December 2021
Championing a new era of alternatives
More and more investors are shifting to alternatives to boost returns, generate income, provide diversification from traditional investments and achieve their goals.
As investors shift to alternatives and these investments grow more complex, there are challenges in getting them right. We are helping to evolve the industry to overcome those challenges and defining a new kind of collaboration for our clients.
Increase1230
professionals
Increase50
offices globally
$329
US$329bn in alternative client assets
BlackRock. All data as of 31/12/21 unless otherwise specified. Number of professionals excludes contingent workers and interns. (1) Client assets include AUM and non-fee-paying uninvested commitments (i.e. committed capital/dry powder) from (i) BLK Core Alternatives, which includes Direct Hedge Funds managed across BLK’s investment platform and (ii) liquid credit assets.
BlackRock is tomorrow’s alternatives platform
Our US$329 billion platform is designed to deliver outperformance with true partnership across a range of investment solutions in: real estate, infrastructure, private equity, credit, hedge funds and alternative solutions. We continue to innovate, leveraging our technology, our scale, and our fiduciary model to better serve our clients.
1 BlackRock has not considered the suitability of this investment against your individual needs and risk tolerance. To ensure you understand whether our product is suitable, please read the [Key Investor Information Document / Prospectus].
2 The [Fund’s/Strategy’s] investments may have low liquidity which often causes the value of these investments to be less predictable. In extreme cases, the [Fund/Strategy] may not be able to realise the investment at the latest market price or at a price considered fair.
3 Beta, used in capital asset pricing model (CAPM), is a measure of the volatility, or systematic risk, of a security or portfolio, in comparison to the market as a whole.
4 Reference to individual investments mentioned in this communication is for illustrative purposes only and should not be construed as investment advice or investment recommendation.
5 Undertakings for the Collective Investment in Transferable Securities.
6 A collective investment scheme domiciled in an offshore jurisdiction.
7 Exchange traded fund.
8 Discretionary and systematic approaches seeking to generate positive absolute returns through investments in a range of equity markets.
