In normal market conditions alternative investments are often used by investors to diversify their portfolio, and reduce risk due to their de-correlation to markets. In the current turmoil we are facing, with fixed income pushing ever lower, and with equities jumping down and up every time a new headline hits the news networks, investors are shifting a larger portion of their capital into alternative vehicles, hoping to not only diversify, but seek attractive returns as well.
To find out more on how investors are using alternative investments, RankiaPro, in partnership with Tikehau Capital, alternative investment specialist, launched a survey which we had our readers (fund selectors, financial advisors and wealth managers) answer. Below we summarize the findings of the survey that had over 100 individual respondents.
The ‘why’ of alternative investments
Since we launched the survey as we were all in the throws of the COVID-19 health crisis, we began by asking respondents whether they believed alternative investments had benefited, or suffered, from COVID-19 and it’s economic impacts. Unsurprisingly, over 70% of respondents believed that alternative investments benefited from the pandemic.
This benefit can be attributed to the stress the virus inflicted on markets, causing investors to seek safe-haven assets, and asset classes that were less affected by the economic fallout caused by required shutdowns of economies.
This was confirmed by our respondents, with over 76% of them valuing alternative investments for their de-correlation to markets, as shown in the graph below. This is compared to only 11% prioritizing them for long-term profitability, and another 11% selecting alternatives to reduce their portfolio risk.
Hedge Funds, followed by real estate
Within alternative investments, investors have many class options to place capital, and not all alternative investment asset classes have fared well during this crisis. In our survey, we asked respondents to select the types of alternative investments they were currently exposed to, in order to gain a better understanding of where professional investors preferred to put their capital.
Close to 65% of respondents are currently invested in Hedge Funds, making it by far the most popular alternative investment. Hedge Funds’ active management style a likely reason why investors opted for them, believing that superior hedge fund managers can pick out the winners from the losers in times of volatility and overall uncertainty.
Over 41% of respondents also cited being exposed to real estate, which is an asset class highly de-correlated from markets, generally inflation-proof, and with the urbanization trend that is occurring around the globe, real assets are likely to provide interesting returns.
Private equity, infrastructure, and commodities followed closely behind, with around 35% of respondents invested in these three asset classes. Gold has historically been the safe-haven asset of choice, and the recent run-up of the price of gold indicates that this time around is no different.
Forward looking opportunities
It is certain that we will emerge from the COVID-19 pandemic into an investment environment vastly different from the one in which we entered. We asked our respondents what opportunities they thought the post COVID-19 environment would offer, and interestingly, the biggest opportunity investors saw was split evenly between Venture Capital and liquid alternatives.
It is likely that the “new normality” will require a vast amount of adaptation in our daily lives, from routine mask-wearing, to the exponential increase in the use of digital tools, and old business models may not be able to survive these changes, making way for innovative new businesses, better suited to the new environment, to take their place. Investors looking to capitalize on this adaptation process can do so through Venture Capital.
Perhaps the most telling response from the survey, although not surprising in itself, is that all respondents answered that they will either increase allocation to alternative investments, or maintain their current weight, over the next 12 months. Not one investor expected to decrease the weight of alternatives in their portfolios.
