Historical performance in different scenariosĪs with any other asset class, it is important to understand how liquid alts have performed in different market and macroeconomic environments to see if they have delivered on their promises. This suggests that a wise use of these different strategies within a multi-asset portfolio may give a chance of improving outcomes on a risk-adjusted basis that may not be achievable by the sole use of “traditional” asset classes. Instead, opportunistic strategies stress their being unconstrained to offer a combination of uncorrelated capital growth and drawdown protection. ![]() Modifiers instead do not have the same defensive/uncorrelated characteristics and instead focus on changing the return profile by smoothing the performance across different market environments through a combination of downside protection and lower upside beta. with a primary objective of providing portfolio diversification. As the name might suggest, diversifiers are strategies with low beta/correlation to traditional markets and factors, i.e. It distinguishes among modifiers, diversifiers and opportunistic strategies. What is their portfolio purpose?Ī useful classification of the use of alternatives in portfolios has been provided in this article. Inherently, there is always a degree of arbitrariness in classifications within liquid alts, and, therefore, investors should not fully rely on them as they do not replace the need for proper due diligence. Other research houses have created other classifications, although generally these share similar characteristics as they usually distinguish among relative value strategies, trend following and more opportunistic such as global macro. For example, Morningstar has categorized hedge funds in seven categories, including macro strategies, event driven and equity Market Neutral among others. However, the classification of liquid alternatives is not a simple one, as funds employ different strategies to achieve their objectives and may invest in different assets. Understanding what liquid alts are is key and classification may help in capturing their essential characteristics. Liquid alts include liquid hedge funds, commodities and REITs, but this should be not considered as an exhaustive list as some investors might include other asset classes to the list, such as public infrastructure or insurance-linked bonds. The higher degree of liquidity sets liquid alts apart from other alternative investments, such as private equity and direct real estate, and this feature makes access easier for investors unwilling or unable to commit and lock capital in for many years. ![]() These strategies argue to offer good risk-adjusted returns whilst maintaining lower correlation to both fixed income and equity markets. Liquid alternatives (from now on abbreviated as ‘liquid alts’) are vehicles offering exposure to asset classes or investment strategies deemed as alternative to more traditional assets such as bonds and equities with a liquidity profile similar to them. Here, some suggestions for thinking about liquid alts, their role in portfolios and how they behaved in historical market scenarios. By Nicolo Bragazza, associate portfolio manager, Morningstar Investment ManagementĪs bonds failed to provide protection during 2022, investors have thought about alternative ways to diversify their portfolios and for many the answer has been ‘liquid alternatives’.
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