The Potential of Alternative Investments

The economic volatility has been a driving force behind the increasing demand for alternative investments. Investors have been exploring options beyond traditional investments such as stocks and shares in an effort to diversify their portfolios and seek higher risk-adjusted returns. Simon Doherty, head of managed portfolio services at Quilter Cheviot, highlights the decline in the number of listed companies over the years, leading to the need for broader exposure to real assets and alternative investment strategies.

The accessibility of alternative investments has also improved with the availability of structures like investment trusts and open-ended investment companies that focus on alternative asset classes. These can now be accessed by a broader range of investors, including IFAs, wealth managers, and retail investors, through various platforms and investment wrappers like Isas and self-invested personal pensions (SIPPs).

One of the key advantages of alternative investments is the access they offer to opportunities not commonly available in traditional asset classes. Private market investments, for example, provide access to companies in emerging fields like artificial intelligence and high-growth companies in Asia. Additionally, they offer strategies that are less correlated with traditional asset classes, such as insurance-linked investments, micro-finance, and market-neutral hedge fund strategies.

In the face of high inflation and interest rates, alternative assets have shown varying performance. For instance, segments of the commodities market offered stability to multi-asset investors. Trend-following hedge fund strategies also performed well through short positions in bonds. On the other hand, real estate exposure faced challenges due to bond market movements and macroeconomic concerns.

The diversification benefits of alternative investments cannot be overlooked. Assets like infrastructure, renewables, private equity, and private credit offer non-correlated returns with the broader macro environment, providing strong downside protection. Venture capital trusts, on the other hand, are primarily driven by revenue growth at young, disruptive companies, making them less dependent on the overall economy.

However, alternative investments come with their own set of risks, particularly concerning liquidity and costs. As such, they should make up only a portion of most investment portfolios, with the understanding that they are designed for long-term holding and not speculative purposes. While these investments may offer higher returns, they also carry higher risks.

Alternative investments can enhance overall returns for long-term investors, especially for those seeking to diversify without compromising on returns. However, it is essential for investors to understand the additional risks associated with these investments and carefully consider their role within a well-balanced portfolio.

In conclusion, the demand for alternative investments has been growing steadily over the years, driven by the need for diversification and higher risk-adjusted returns. While these investments offer unique opportunities and diversification benefits, investors should exercise caution, conduct thorough research, and understand the risks involved. In a volatile market, alternative assets can play a vital role in enhancing a well-structured investment portfolio.

(Source: FT)

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