Investments  

Alternative investments: One way or another

    CPD
    Approx.60min

    While some might argue alternative investments are the preserve of the very wealthy, Fred Hervey, managing director of Berenberg Private Bank in the UK, says that is simply no longer the case. “I don’t think commercial property, private equity and hedge funds should be determined any less suitable,” he says, adding that many investments have been marketed badly and others have been opaque.

    Mr Maltin says alternatives can be used to counterbalance a portfolio. When it comes to the likes of gold, macro-trading hedge funds, property, targeted return strategies and infrastructure, he says, “To us they’re not alternatives, they are part of the asset allocation process and play an everyday role in a portfolio.”

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    When building a portfolio, Mr Maltin says a way to protect from the downside of equities is to use either a government bond or an alternative asset. In this case, he defines an alternative as something where its correlation to equities is less than 0.4, where 0.0 is not correlated at all and 1.0 is full correlation.

    Meanwhile, John Greenwood, chief executive of Creechurch Capital, says about a fifth of his firm’s portfolio is in alternative assets to offset volatility in equity markets.

    At the moment he says his firm favours alternative finance funds, which fill a void left by banks that are lending less, and property, which is currently affordable after asset values fell following the credit crunch.

    “The image of alternatives has been tarnished by the likes of life settlement and carbon credits in the past 12 months, but, in reality, the asset class offers attractive and respectable opportunities including hedge funds, infrastructure, commodities and property,” he says.

    ‘Mainstream’ alternatives

    With the explosion of Ucits funds in recent years, most of what previously were difficult assets to access now have relatively low minimum investment levels and, in the case of investment trusts, are traded on the stock exchange like company shares.

    Graph 1 shows how the major alternative assets – commercial property, commodities, hedge funds, infrastructure and private equity – have performed in the past five years.

    The graph shows a clear disparity between property and private equity on one side and infrastructure, commodities and hedge funds on the other.

    Property and private equity suffered greatly as a result of the financial crisis and have yet to recoup their losses. Infrastructure, however, has managed to produce steady upward growth. Commodities have been more volatile but have managed to produce positive returns, while hedge funds have recorded flat performance in the past few years despite recovering from their losses in 2009.

    Commercial property funds are perhaps the most mainstream of them all and, while some would argue this is not an alternative asset, the fact it has a low correlation to equities over the long term means it lies in this category. “The method that you [employ to] get access to alternatives is important,” Mr Hervey at Berenberg says, adding commercial property is the easiest. Currently it is possible to invest in open-ended funds that invest either in direct property or in company shares, while real estate investment trusts (Reits) also allow investment into direct or indirect holdings.