Diversifying into hedge funds and private markets can help investors generate alpha, hedge inflation, manage rate uncertainty, and grow wealth along structural trends. (UBS)

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.

  • Developed market inflation is off its highs, but core rates remain above central bank targets.
  • Uncertainty around the path for rates, growth, and profits has led to range-bound equity markets and pockets of volatility.
  • Long-term trends around demographics, deglobalization, and decarbonization may require investors to be more selective.

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.
  • Over the past 25 years, hedge funds (HFRI Fund Weighted Index) made net-of-fees returns of 6–7%, in line with global equities (MSCI World TR) but with half the volatility.
  • 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 long-term “inflation-hedging” characteristics.
  • Private debt can help long-term goals amid higher yields, strict underwriting standards, and an expanding market as banks tighten credit.
  • 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. Private lenders’ greater control over setting underwriting standards can help reduce default 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 - Matthew Carter, Alison Parums

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

Original report - Can alternatives help navigate macro uncertainty?, 12 June 2023.