Why fund pickers are turning more to alternatives

Fund pickers are increasingly buying into alternative asset classes and using them for more than diversifying risk, according to a survey of professional fund buyers by Natixis Investment Managers.

The survey, which was carried out at the end of 2017 with 200 respondents from 23 countries, revealed that tightening monetary policy, increasing volatility and rising rates are causing professional fund buyers to look outside of traditional asset classes to achieve their goals.

Alternatives now present themselves as an attractive solution for generating both income and alpha while mitigating risk.

According to the survey, unstable income streams caused by the low yields brought on by quantitative easing since the financial crisis and the higher interest rates currently expected across the globe mean that alternatives are being used as a replacement for fixed income.

Natixis’ report revealed nearly 60 per cent of the fund buyers questioned are increasingly replacing fixed income with alternatives. The most popular income-generating asset class was revealed to be real estate, accounting for over half of those questioned.

Top portfolio applications for alternative investments

Source: Natixis Investment Managers

“Four in ten believe infrastructure is well suited to addressing their income objectives, while more than a third (35 per cent) see private debt as an effective vehicle. While private markets are less liquid, the preference for private debt is in line with the broader views on liquidity as 67 per cent say the potential returns of illiquid investments make them worth the risk,” Natixis said.

Of particular importance to the fund buyers in the survey was that the alternative assets allow them to generate alpha, something that has been lacking in today’s markets.

“Recognising that efficient markets make it difficult to generate alpha, professional buyer sentiment identifies both private equity (58 per cent) and private debt (31 per cent) as effective in the pursuit of stronger returns,” the survey reported.

Volatility is back in financial markets and the survey found that alternatives are providing fund buyers with a way of mitigating this risk.

A majority of those surveyed by Natixis believed the fixed income asset class will no longer protect their portfolio from stock market volatility like it traditionally has done. As a result, some 20 per cent stated they would increase their holdings in alternatives and a further 18 per cent said they would reduce their exposure to the bond market.

The above table shows that the two most popular portfolio applications for mitigating volatility within the alternative asset class are hedged equities and managed futures.

Natixis’ report added that traditional asset classes “are too closely correlated to provide distinctive return sources.”

The alternative asset classes that fund pickers preferred were commodities, global macro, infrastructure, private equity and managed futures with seven out of 10 respondents believing it essential to invest in alternatives to have a diversified portfolio.