Alternative investments: Fuel for your portfolio?

Why now?

As the longest ever economic expansion shows signs of weakness, in our view, ensuring investor portfolios are truly diversified is becoming crucial. That is particularly the case since government bonds, long viewed as a hedge in a simple 60/40 portfolio, now offer little in the way of income, and have often moved in tandem with risk assets in recent years, especially during inflation scares. To us, it’s no surprise that alternatives have become an invaluable tool for advisers and investors alike.

Boost your portfolio?

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 alpha and alternatives.

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

Alternatives remain favoured by asset allocators as market volatility continues.

Source: BlackRock, 30 January 2020.

 

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

Source: BlackRock, 30 January 2020.

Alternatives seek to exploit:

1 Diversification

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

2 Improved risk and reward profile

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

3 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, delivering superior tail-risk protection over time^2.

Portfolio insights (for Professional Clients, Qualified Clients and Qualified Investors Only)

¹ The views expressed do not constitute investment advice and are subject to change.
² A Strategy’s investments may have low liquidity which often causes the value of these investments to be less predictable. In extreme cases, a [Strategy] may not be able to realise the investment at the latest market price or at a price considered fair.

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