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Can alternatives help mitigate market risks?


Assets like infrastructure, real estate, and private markets can improve the resilience of a portfolio against inflation, while some hedge fund strategies can perform well in recessionary scenarios and help mitigate portfolio volatility when equity-bond correlations rise.

Exposure to alternatives in a diversified portfolio can help investors navigate an uncertain environment.

  • Hedge funds have the potential to deliver performance even if bonds and equities are both falling.
  • Investing in private equity following public market declines has historically been associated with strong returns.

Hedge funds can be an effective diversifier.

  • Select hedge fund strategies can help build defensive market exposure or reduce risk as they tend to exhibit lower sensitivity to global markets and include a focus on risk management and downside mitigation.
  • In the first seven months of this year, the HFRI Fund Weighted Composite index dropped just 4.1%. This compares to a 15.3% slump in the MSCI All Country World index.
  • Strategies we currently focus on include discretionary macro funds, relative value and low net equity long/short strategies, and multi-strategy hedge funds.

Private markets can provide investors with long-term growth.

  • In exchange for a longer lock-up period, private markets can offer a combination of access to early-stage, innovative, and fast-growing businesses and potentially higher returns.
  • Private credit and private real estate funds have been among the chief beneficiaries of the recent growth in private markets.
  • We think still-low financing costs by historical standards and inflation-indexed rental contracts should support direct real estate returns.

Did you know?

  • Macro hedge funds returned 7.4% in the year to end-July, mostly driven by strategies based around commodities, developed market fundamental discretionary, and quantitative trend-following. These funds often have the flexibility to flourish in an environment of choppy or falling markets.
  • Based on records dating back to 1995, the average annual return on global growth buyout funds launched a year after a peak in MSCI ACWI is 18.6%, according to Cambridge Associates.
  • With uncorrelated returns increasingly harder to find, a recent UBS survey found that family offices globally are increasing investments in private equity, real estate, and private debt as they reassess their strategic asset allocation.

Investment view

  • We think investors looking to diversify sources of risk and return might wish to consider hedge funds and private markets. Investors should note that alternatives can carry unique risks, including reduced liquidity, higher costs and complexities, which you should discuss more with your advisor.

Original report – Can alternatives help mitigate market risks?, 8 August, 2022.

Content is a product of the Chief Investment Office (CIO).

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