At a global level, we see value in adding exposure to hedge funds and private assets in a multi-asset portfolio, given the potentially compelling returns on offer and their ability to offer diversification to portfolios.
Our capital market assumptions forecast attractive risk-adjusted long-term returns for alternatives:
Source: Bloomberg, HSBC Global Private Banking as at 9 March 2025. Forecasts are subject to change
Hedge funds
Hedge funds tend to do well in environments that are characterized by elevated volatility and low correlations. We have been in such an environment for the past few years and looking ahead we think volatility and dispersion in equities, fixed income and currencies will continue to provide a rich opportunity set for hedge funds. The common misconception around hedge funds includes the view that they are inherently very risky or consistently underperform equities. In fact, hedge funds can play a significant part in capital preservation and portfolio diversification, thanks to reduced drawdowns and low correlation compared to the broader equity markets.
Private equity
After a temporary lull in 2024, global private equity market has started 2025 on a stronger footing, showing signs of recovery. Global M&A activity is also showing signs of a potential rebound in 2025 as deal making has already increased. While public market valuations (say for S&P 500, Nasdaq etc.) have risen in recent years, the private equity valuations have lagged. As a result, we see increasingly attractive opportunities in the lower and mid-market segment, thanks to reasonable valuations and a wide range of future exit opportunities.
Alternatives is still a nascent asset class in India, which has accelerated over the past 3-4 years. From my perspective, the combination of solid regulatory framework, increased awareness about financial investing following the pandemic and emergence of the start-up culture have jointly contributed to creating greater investor interest in alternatives. Indian UHNWIs, with a strong appetite for alternative investments, are turning toward Alternative Investment Funds (AIFs), venture capital, and private equity to capture high growth opportunities beyond traditional asset classes.
Their portfolios increasingly include stakes in start-ups, often through angel investments, reflecting an eagerness to tap into India’s booming start up ecosystem. That said, the share of alternatives held by Indian High Net Worth (HNW) individuals is still well below that observed in the rest of the world.
Within India, the private equity (PE) space stands out as the most vibrant area within alternatives. While there are about 10,000 listed companies in India, estimates indicate that there are nearly 1 million unlisted companies, providing a deep opportunity set for private equity investors. Investors can access a wider set of fast-growing companies at relatively reasonable valuations.
As per EY, the number of Private equity / venture capital deals touched an all-time high in 2024. This is not surprising given the rise of domestic PE players as well as increase in share of Indian investments within global PE funds. Encouragingly, we have seen a healthy market for PE exits through IPO route as well. In fact, majority of the new listing in India over the past few years have come from PE-sponsored companies.
The Number of PE/VC investments rose sharply in 2024
Source: EY, HSBC Global Private Banking as at 9 March 2025.
In summary, the rise of alternatives as an asset class not only offers Indian investors access to different sources of return (not accessible in public markets) they also offer valuable diversification away from the traditional financial portfolio of equities, bonds and gold.
— The author, Abhilash Narayan, is Investment Strategist, HSBC Global Private Banking and Wealth. The views are personal.