Alternative Investment  

Easing the ride in turbulent markets

This article is part of
Autumn Investment Monitor - September 2016

This is a market that is not without risk – as ever, it is easy to lend but not always so easy to get the money back. But there are good players in this market and banking models must change given new regulation and increased capital requirements on traditional lenders.

On a larger scale, the global loans market is an area in which opportunity has arisen due to the scaling back of lending by banks. Unlike a bond, the loan is paid back over its length, rather than in one payment at the end of the term.

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Loans also rank higher than bonds in a company’s structure, meaning lenders get more back if the company defaults on payment. Companies also rank loan repayments above bond repayments, yet interest rates are typically higher, meaning a potentially attractive level of income.

Diversification by buying poor-quality assets will just lead to lower returns. Investors need to do their homework and buy diversifying assets on merit, not just because they are different. But the assets outlined do provide the potential for attractive returns, which have a low correlation with those provided by more mainstream assets.

Alternative assets should not be seen as a panacea and they will certainly not all thrive in a bear market, but when held as part of a diversified portfolio, exposure to the right alternative asset funds will help investors to both boost returns and smooth the ride through any future market turbulence.

Richard Dunbar is senior investment strategist, investment solutions at Aberdeen Asset Management