Investors struggled to earn positive returns in 2022.
- Both stocks and bonds experienced heavy losses in 2022, making it challenging to obtain absolute returns or diversification.
- Despite data showing falling inflation, we think fears about future inflation and monetary policy are likely to stay in focus this year.
- Alternatives should continue to play an important role in diversifying portfolios as long as investors are aware of certain drawbacks, including illiquidity risks. Investors need to be willing and able to lock up capital for longer.
Hedge funds can provide uncorrelated returns.
- Hedge funds outperformed global equities and bonds in 2022, with the HFRI Fund Weighted Composite Index down just 4.2%.
- Some strategies, like macro, performed quite well, led by funds employing systematic, trend-following, and commodity strategies.
- We currently like macro funds, equity market neutral funds, and multi-strategy funds.
Private market investments also look compelling.
- Private market investments can provide attractive absolute risk-adjusted returns over the long term, while taking risks into account. Between 2001 and 2021, global private equity returned 13.8% annually, versus 7.1% in publicly traded global equities.
- Putting fresh capital to work following declines in public markets has seen even better performance.
- In the current environment, we see opportunities in secondaries, distressed/restructuring debt, and value-oriented buyouts such as take-private deals, carveouts, and divestitures.
Did you know?
- Both hedge funds and private markets come with certain drawbacks, including the risk of illiquidity. Investors need to be willing and able to lock up capital for longer.
- Based on our analysis of Cambridge Associates' records dating back to 1995, the average annual return on global growth buyout funds launched a year after a peak in MSCI ACWI is 18.6%. This compares with 14.8% for funds launched in the year of a peak and 11.4% for funds launched in the year prior.
- A recent UBS Investor Sentiment survey showed that 53% of investors have already allocated to alternatives, while 33% are planning to increase their exposure over the next six months.
- Watch our Deep Dive videos on hedge funds and private markets.
With inflation data and central bank policy driving both equities and bonds, we recommend investors diversify into less correlated strategies such as hedge funds and private markets to navigate uncertainty.
Main contributors - Daisy Tseng, Karim Cherif
Content is a product of the Chief Investment Office (CIO).
Original report - Is now the right time for alternatives?, 20 January 2023.