We know pretty well how liquid assets like equities, bonds and credit perform in an economic downturn or during market turmoil. But how about alternatives, an asset class that investors have poured trillions of dollars into in the past 10 years? How will they fare during a downturn? How recession-proof are they and how much downside return protection are they able to provide?
To gauge how
recession-proof the different alternative asset classes are, we look at their
performance during historical periods of recessions or market turmoils.
We have deliberately
chosen the following asset classes in our analysis:
We start our analysis by looking at the performance of these selected alternative investments during historical crises that we define as negative equity markets and/or noteworthy macroeconomic events.
It is worth pointing out that no two crises are identical, which is helpful to our analysis as we want to identify different drivers of performance and to see, whether some alternative investments have a general robustness or not.
While working on our analysis, the world and not least the financial markets were hit by the next crisis: COVID-19.
Some of our findings
are:
Conclusions
Our analysis shows that alternative investments have performed very differently during historical downturns and that they are far from always providing the same portfolio protection as bonds.
Based on the historical experience, it is our recommendation that investors with significant shares of their portfolio invested in alternative investments, i.e. most institutional investors in Denmark and in the Nordic countries, take a thorough look at their portfolio to identify any unexpected risks which may give a negative surprise in the next economic downturn.
Investors must be very aware of the increased country risk on their alternative investments in the Eurozone in future economic downturns.
The full analysis can be read at http://www.christoph-junge.de/alternative-investments-during-crises/.
About the authors
Christoph Junge is Head of Alternative Investments at Velliv;
a major Danish pension fund. He is a Chartered Alternative Investment Analyst
and has more than 15 years of experience from the financial industry in both
Denmark and Germany. He has worked with Asset Allocation, Manager Selection as
well as investment advice in, among others, Nordea, Tryg and Jyske Bank. He was
awarded Rising Star of the Year by Institutional Investor Institute in 2019.
Frank Hvid Petersen has a solid theoretical and practical
experience with macroeconomics and financial markets after almost 25 years of
working in the financial sector. He has been Head of Strategy and Portfolio
Management at Carnegie Wealth Management and a portfolio manager of global
equities and fixed income. Today he has his own advisory firm. Previous
positions include joint Head of Strategic Investment Advice and Chief
investment Strategist at Nordea including chairman of Nordea’s Global
Investment Committee. Before that he was economist, chief economist and chief
equity strategist at Alfred Berg. He has won several top rankings in the annual
Prospera institutional investor rankings of best macroeconomic and equity
strategy analysts. He holds a M.Sc. (Econ) and has extensive teaching and
presentation experience.