Investors have become more confident in a US soft landing given more resilient US growth and earnings data. (UBS)

Private markets may offer a variety of opportunities to earn income and grow wealth over time. But investors need be aware of the drawbacks related to alternative investments, including illiquidity risk.


Economic views are shifting and volatility is normalizing.

  • Investors have become more confident in a US soft landing given more resilient US growth and earnings data.
  • However, interest rate volatility remains elevated, with the first US cut now only priced for May next year.
  • The VIX Index of implied US equity volatility stood at 15.6 as of 24 August, below the average since the 1990s of around 20 times. But the summer months will likely mark the lows for volatility.

Hedge funds can generate alpha and help boost risk adjusted returns.

  • Hedge funds have historically performed well in a high rate environment, returning 8.5% annually between 2000 and 2007.
  • Over the past 25 years, hedge funds (HFRI Fund Weighted Index) made net-of-fees returns of 6–7%, matching global equities (MSCI World TR) with half the volatility.
  • We like strategies including macro, low net equity long/short, multi-strategy, and specialized credit strategies.

Private market investments may help generate income and grow long-term wealth amid uncertainty.

  • Private debt offers appealing income—new loans provide 12.5%according to JPMorgan—but potentially stricter covenants and underwriting than high yield, in our view.
  • We favor value-oriented buyout strategies in private equity. Secondaries offer value and appealing discounts (at around 16%of NAV at the time of writing).
  • Investors should understand inherent risks of private assets, including illiquidity, longer lockup periods, and use of leverage.

Did you know?

  • In our base case, we expect the S&P 500 to climb to 4,700 by end-June 2024, but note it now trades on 19x forward earnings, above its pre-pandemic levels. By contrast, valuations for private markets have yet to reflect this more resilient outlook. Entry EV/EBIDTA multiples for private markets (US mid-market leveraged buyout names) actually fell in the first quarter, with median valuations of around 10–15x across sectors—albeit with high dispersion.
  • Private lenders’ greater control over setting underwriting standards can help reduce default risk.

Investment view

We recommend complementing traditional bond-equity portfolios with an allocation to alternatives, which can help diversify portfolios and potentially boost returns. Hedge funds can generate returns even in flattish markets. Meanwhile, private markets offer a variety of opportunities to earn income and grow wealth over time, including in private equity, private credit, and real estate.


Main contributors - Matthew Carter, Alison Parums


Original report - Can alternatives help navigate macro uncertainty?, 1 September 2023.