Alternative investments Can alternatives help navigate macro uncertainty?

In hedge funds, we like strategies such as macro, which can profit from inflections in economic trends. Meanwhile, private market secondaries and distressed strategies could be well-positioned to buy assets at attractive valuations.

Uncertainty and macro risks are likely to stay elevated.

• The macroeconomic regime has shifted since COVID-19 and the war in Ukraine. Governments are investing heavily to boost security and self-sufficiency in a number of areas, inflation is likely to stay relatively high, and economic growth prospects are mixed.
• With fragility and macro uncertainty likely to dominate markets, investors with sufficiently long time horizons and tolerance for illiquidity should continue to look to alternatives as a way to bolster and diversify portfolio returns.

Hedge funds can generate alpha and help boost returns in a risk-adjusted manner.

• Hedge funds have historically performed well in a high rate environment, with an 8.5% annual return between 2000 and 2007.
• Recent capital inflows to hedge funds highlighted investor focus on risk management and downside mitigation amid banking risks and recession fears.
• We like strategies including macro, low net equity long/short, multi-strategy, sustainable investment, and credit long/short.

Private market investments can help hedge inflation, manage rates uncertainty, and grow long-term wealth.

• Private infrastructure and real estate exhibit “inflation-hedging” characteristics.
• We think private debt should prove resilient in the current environment amid higher yields and an expanding opportunity set.
• Private equity offers exposure to fast-growing and innovative businesses, while value-oriented buyout strategies and secondaries should continue to gain traction.

Did you know?

• Both hedge funds and private markets come with certain drawbacks, including the risk of an illiquid market. Investors need to be willing and able to lock up capital for longer.
• Private market investments can provide attractive absolute risk-adjusted returns over the long term. Between 2001 and 2021, global private equity returned 13.8%annually, versus 7.1% in publicly traded global equities.
• Compared to most fixed income strategies, private debt investors benefit from variable interest rates, a high level of control, and lower volatility. While the asset class is still exposed to the risks of defaults, private lenders’ greater control over setting underwriting standards allows for some management of this risk.

Investment view

With uncertainty and macro risks likely to stay elevated, we recommend investors look to alternatives to bolster and diversify portfolio returns.

Main contributors - Daisy Tseng, Karim Cherif

Content is a product of the Chief Investment Office (CIO).

Original report - Can alternatives help navigate macro uncertainty?, 15 May 2023.