Navigating an alternative universe

In my view, the key challenge here is for wealth managers to know exactly what clients are exposed to

Marcos Camhis
FOS Asset Management

‘Our hedge fund allocations have remained fairly consistent in size over time, and most clients have between 10% and 15% in this area. Overall, we think they offer attractive returns and good de-correlation from traditional asset classes’
Izabel Moura, Brainvest

While some alternative assets classes – hedge funds in particular – may grab the headlines, the universe is much broader than this would imply.

‘Alternatives are a very broad space, and the term itself is something of a catch-all,’ said Marcos Camhis, CEO at FOS Asset Management. ‘Essentially it covers everything that is not simply a traditional portfolio staple such as equities, bonds or cash.’

This sheer diversity, and the different risk/return profiles and liquidity aspects of each individual asset class, adds diversification possibilities but also creates challenges.  

Most important is how alternative investments sit with clients’ other investments, he said. ‘Alternatives are a vital tool for diversification and returns but it is very important to understand the coherence of the allocation within a client’s overall portfolio,’ Camhis said. ‘For example, a client may have considerable long equity exposure and use long/short equity hedge funds to balance that,’ he added.

Another specific challenge is access, Camhis said. ‘The hedge fund space has been gradually democratised and many managers have embraced a more regulated environment, in particular via UCITS 1vehicles,’ he said. ‘This has made them much more accessible to a wide range of investors at the same time as offering much greater liquidity.’ 

Keeping things clear

By contrast, other areas can be much less liquid. For example, within private equity and real estate, seven- to 10-year investment cycles are the norm. ‘In my view, the key challenge here is for wealth managers to know exactly what clients are exposed to, and to be able to explain that clearly. There can be a risk that a wealth manager might propose a long-term investment whose implications the client does not fully appreciate,’ he said.

Within his own business, Camhis segregates alternatives into different liquidity buckets. ‘During previous experience as a hedge fund investor, I saw many mismatches in this area. For example, fund portfolios with monthly or quarterly liquidity that had allocated to illiquid private equity and real estate holdings. It has made me very aware of the need for clear liquidity profiles,’ he said.

One way that more traditionally illiquid alternatives asset classes such as private equity, real estate and infrastructure can be accessed is via listed vehicles, he pointed out.

‘There can be many advantages to these: they offer a degree of regulation and the liquidity premium2 is clearly visible in the premium/discount of the trading price,’ Camhis said. On the London exchanges, listed hedge fund vehicles are less plentiful in the post-2008 environment, but have been replaced by infrastructure, renewables and private equity. On the Swiss exchange, listed real estate appears to be receiving a lot of investor allocation currently, he said. 

The less liquid end of the alternatives spectrum has been an area of growth for Brainvest, as investment specialist Izabel Moura explains. ‘We have been gradually increasing our allocation to alternatives over the last five years. While we are long-standing hedge fund investors, most of the increase has been to less liquid strategies such as private equity, private debt and venture capital,’ she said.  

The reason is the diminishing yield on fixed income investments: ‘We believe there is now a marked asymmetry for clients in terms of how much they stand to gain or lose. And we have turned to alternatives as a way to make up the shortfall,’ she said.  

As alternative sources of income, the firm has a strong interest in the real estate space. ‘Within this area, we favour income-generating strategies with real underlying assets that effectively give us a form of guarantee,’ she noted. Accordingly, the majority of the firm’s private debt holdings are linked to real estate.

At the same time, hedge funds continue to be a part of the firm’s client portfolios. ‘We take a broadly diversified approach within hedge funds, and allocate across many of the different asset classes.

‘Our hedge fund allocations have remained fairly consistent in size over time, and most clients have between 10% and 15% in this area. Overall, we think they offer attractive returns and good de-correlation from traditional asset classes,’ she said.

1 Undertakings for the Collective Investment in Transferable Securities

2 A liquidity premium is the term for the additional yield of an investment that cannot be readily sold at its fair market value.