Asset Allocation Insight – February 2016

In this discussion of alternative investments, Nick Ryder explains that the increased weighting in this asset class is the result of less attractive prices in traditional asset classes.

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“Alternative investments” is a broad term and there is no single definition as to what makes an investment alternative, as opposed to traditional. In general, alternative investments will typically include hedge funds – funds that are designed to hedge against movements in markets.

Strategies that are not hedged against market moves, such as commodities, long/short equity funds and market trend-following funds, can also be called alternative investments. Additionally they can also include a range of investments that would otherwise be influenced by market direction if they were traded and listed, such private equity, private debt, infrastructure, forests and property.

Due to the diversity of alternative investments, it is challenging for asset allocators to embed them within diversified portfolios and there is no single alternative investments index, to measure the risk and return attributes of the alternative investment universe.

It can also be difficult to generate forecasts of the potential returns from alternative investments and to determine whether alternative investments are more or less attractive than traditional asset classes at any point in time. The returns from individual alternative investment funds (for example a market neutral equity hedge fund) tend to be heavily influenced by the skill of the particular fund manager in selecting investments, rather than whether asset prices in general are relatively cheap or expensive.

For these reasons our current overweight recommendation for alternative investments is partly based on other traditional asset classes being unattractive rather than the current economic and market environment being particularly conducive to alternative investment strategies as a whole.

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