Displaying items by tag: alternatives
Wealthy Investors Increasing Exposure to Alternative Assets
UBS conducted a poll of wealthy clients, working with a specialized portfolio advisory group. In response, it has increased its recommendation for exposure to alternative asset classes such as private equity, private debt, real estate, structured products, and hedge funds from 16% to 22%. Endowments and large single-family offices have already increased allocation to private markets, but wealthy investors are making up ground.
This is due to an increase in the number of options which allow clients to immediately invest in private markets with lower amounts and less restrictions on withdrawals. According to Daniel Scansaroli, the head of portfolio strategy in UBS’ CIO Americas office, “The concept of investing in private markets is not new to our clients, but the accessibility of the market has changed in the last couple of years with what many of the private sponsors are calling a democratization.”
Currently, the firm recommends an allocation of 30% to private markets, 30% to bonds, and 40% to stocks and believes this is the new benchmark. It favors this over the traditional 60/40 portfolio as it would have generated an incremental 1.4% in incremental returns even after accounting for fees.
It believes that private markets offer more opportunity than public markets due to the ‘illiquidity premium’, assuming that investors can remain patient. Over multiple timeframes, private equity, venture capital, private credit, and real estate have shown to outperform the S&P 500.
Finsum: UBS conducted a survey of its wealthy clients and found that they are looking to increase their allocation to private investments.
Alternative Market Expected to Reach $26 Trillion by 2026
In a CNBC interview, CAIS CEO Matt Brown commented on the alternative asset market. He believes that a major factor behind the current growth of the category is due to increased access, highlighting venture capital, hedge funds, private real estate, and private equity.
He forecasts that alternative exposure will continue to increase among investors and advisors along with greater access. He also believes that the traditional 60/40 portfolio will shift and become a 50/30/20 mix between stocks, bonds, and alternatives. This reallocation will result in $10 trillion moving into alternatives over the next few years according to Brown.
CEO Rob Sechan of NewEdge Wealth also added that alternative investments provide diversification and a better chance of achieving targeted returns especially in an environment of falling returns for stocks and bonds.
He believes that consistent private market performance is due to greater operating and financial leverage while public securitie performance is too economically sensitive. Investors in private markets are also able to take advantage of dislocations in public markets by buying discounted assets with a long duration during selloffs. Recent examples include the European debt crisis and Silicon Valley Bank.
Finsum: Alternative investments are becoming a major asset class and increasingly a larger allocation for some investors and advisors.
Why Alternatives Make Sense In This Economy
Alternative investments encompass everything excluding equities, fixed income, and cash or money markets. According to Angie Spielman,the founding partner and a financial advisor at Manhattan West, this is a great time to invest in alternatives, and she recommends a 33% allocation for her clients assuming that it fits their risk profile.
Demand for alternatives is growing given that the asset class outperformed in 2022 while both stocks and bonds posted negative returns. Additionally, it’s proven to be a source of positive returns and diversification.
Spielman sees the new benchmark portfolio as being equally divided between equities, bonds, and alternatives. Although, she warns that this mix is not appropriate for more risk-averse clients. She also believes that private markets will outperform public markets over the next decade. Within the asset class, she favors private equity, venture capital, real estate, and private debt.
In addition to benefiting existing clients, providing access to these types of investments can also attract prospects who are more risk-tolerant and seeking diversification. She recommends easing new clients into these types of investments with smaller sums at the beginning. Alternative investments do typically have higher fees and tend to have less liquidity and transparency than traditional options.
Finsum: Alternative investments are growing in popularity and offer specific benefits to advisors and clients.
PIMCO Sees Opportunity in Alternative Investments
One of the consequences of tighter monetary policy is that traditional sources of funding such as banks and public markets have dried up. This void has created an opportunity for private financing.
Pacific Investment Management Co. (PIMCO) is seeking to capitalize on these circumstances. Typically, PIMCO is known as a bond powerhouse but in recent years, its alternative segment has made some impressive strides. It sees opportunities to extend credit to companies in need of capital and has been coming up with creative strategies to facilitate this. This includes lending against assets and across the capital structure in addition to offering equity stakes for investors.
The firm is also increasing the number of portfolio managers who are dedicated to private credit and believes it can achieve private equity-like returns in the current environment. It also sees opportunity in the loan books of banks that are looking to shed risk and are focused on strengthening their balance sheets.
It sees upside opportunity in segments like tourism, airlines, gaming, concerts, theme parks and rental properties. However, it’s looking to reduce exposure to banks given the combination of a slowing economy and an inverted yield curve.
Finsum: PIMCO sees opportunity in private credit given that traditional sources of financing have become more difficult to access.
Downsides of Investing in Alternatives
In Kiplinger’s, Peter J. Klein, CFA and the founder of ALINE Wealth, discusses some downsides of investing in alternatives. Alternative investments include private equity, private credit, real estate, collectibles, etc., and it’s seen a surge of interest especially following its outperformance in 2022 while stocks and bonds saw double-digit losses. Additionally, accessibility has also increased due to regulatory changes and technology.
Over the next 5 years, the global market for alternatives is expected to nearly double from $9.3 trillion to $18.3 trillion. While many are focused on the potential for outperformance and diversification benefits, Klein points out some downsides that investors should consider.
Alternatives come with substantially less liquidity than investments in stocks and bonds which are liquid and transparent. In contrast, alternatives often require money to be locked up for long periods of time with a hefty fee to access it early. Many alternatives also come with ‘gates’ which mean that money can’t be withdrawn once redemptions reach a certain threshold.
Another consideration is that alternatives often require more complicated tax reporting. For many investors with smaller sums, this complication offsets any benefit in terms of additional returns. Further, there is no track record of alternatives outperforming over longer time frames especially when accounting for the additional fees. Short-term results may be skewed as the asset class outperforms due to the asset class becoming more accessible.
Finsum: Alternative investments have been gaining in popularity especially after strong performance in 2022. However, there are some drawbacks that should be considered.