Like any investment, alternatives involve risks that should be understood both in isolation, and in the context of a broader portfolio.
Not all alternative investments are created equally and each will bring its own unique benefits, and risks, to a portfolio. It is also important to remember that alternative assets are not always readily available, and information in the public domain may be limited.
They can also be complex – certain hedge fund strategies, for example, may involve sophisticated financial instruments such as derivatives or leverage.
Due diligence and selection is, therefore, extremely important because returns on alternative strategies are often driven by the skill and execution ability of the manager.
This is demonstrated by the fact that the returns gap between the top and bottom performing hedge funds and private equity funds in any given year tends to be large relative to public market peers.
Active investors must consistently aim to find the right mix of return drivers and diversifiers for the prevailing macroeconomic and market conditions, but with a keen eye to the future too.
Given the bull run in most equities over the past seven years, plus low levels of bond yields, finding alternative return drivers and diversifiers is more crucial than ever.
We believe that commodities, infrastructure, volatility winners and tail-risk protection strategies can all be deployed to improve investment journeys and maximise the probability of hitting return objectives, while pragmatically and carefully managing risk.
Graham Bishop is investment manager at Heartwood Investment Management
