Allocations to alternative investment are poised to increase and become more significant, according to the CFO of AGF Management Limited.
Speaking as part of an AGF roundtable on alternatives, entitled The Fourth Allocation, Adrian Basaraba said the seminal moment for the space arrived when the financial crisis hit in 2008.
He said people became “hypersensitive” to the vagaries of the equity market and realized that cross-correlations were a lot higher than assumed.
“Since then, investors have been keen to find new ways of mitigating the risk of another major downturn through non-traditional asset classes and strategies that have the potential to provide uncorrelated – or at least low correlation – returns to stocks and bonds.”
He added: “Over the past few years, there have been a lot of institutional surveys that have asked the question, ‘Do you plan to increase your allocation to alternatives’, and of the ones I’ve read, about 70% to 90% of the participants answer, ‘yes’. That doesn’t mean we’re going to see alternatives dominating portfolios, but allocations may increase, on average, and become more significant.”
With an increase in interest, how do advisors and investors go about incorporating alternatives into their overall portfolio?
Bill DeRoche, chief investment officer, AGF Investments LLC, and head of AGFiQ alternative strategies, said they need to ask how it changes the return profile and whether that fits with tjheir expectations when combined with other investments.
The liquidity profile must also be considered. No matter how great the private investment is, for example, your money is going to be locked up for quite some time.
“Investors need to evaluate and then figure out what fits best for them,” he said, adding: “When you look at the some of the most sophisticated institutions or something like the Yale Endowment Model, most of the heavy lifting is being done by core exposure to equity and fixed income with supplementary allocations to alternatives in the range of 15 to 20% to help manage overall volatility in the portfolio. I think this makes a lot of sense for retail investors too, although perhaps to a lesser degree.
DeRoche believes the alternative space has become more democratized and diverse in terms of what’s available, whether it be a structured “liquid-alt” product like a long-short ETF, or a privately-held asset class like real estate or infrastructure.
This has led to some confusion among investors and Jane Buchan, CEO of Martlet Asset Management, said it’s important people understand the differences in structure and levels of risk.
She said: “There is no clear, universally accepted definition of alternatives, but what most of us mean are strategies involving securities outside of standard stocks and bonds or else strategies which involve going long and/or short in stocks and bonds.
“Importantly, alternatives cover a variety of risk and return combinations – some contain more risk and are higher return, whereas others have relatively low risk and produce a corresponding, lower return. Regardless, most alternatives are less correlated with traditional investments.”