For many people, the moment the phrase ‘alternative asset’ is mentioned, it raises alarm bells. This, says James Maltin, investment director at Rathbone Investment Management, is partly due to the bad press alternatives received in the aftermath of the 2008 financial crash.
Because the likes of Ponzi schemer Bernard Madoff and hedge fund managers are associated with this sector, many investors have formed a negative opinion. Furthermore, more esoteric assets like fine wine and art are linked with instances of fraudulent deals, which has also done little to promote a positive view.
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.”
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.
