By UBS Editorial Team
How should investors diversify their portfolios amid further monetary policy tightening and lower returns in the coming decade?
It’s no secret that the year of 2019 will bring elevated volatility as the global economic cycle draws closer to its tail end. In addition to slower economic growth – forecast at 3.6%, compared with 3.8% in 2018 – geopolitical tensions will also add to the mix of uncertainties facing investors.
While investment opportunities remain, the challenging macro-economic environment means that returns generated from traditional investment vehicles including stocks and bonds are likely to be lower in the years to come.
The case for holding alternative assets in strategic asset allocations is therefore particularly strong during this stage in the economic cycle.
In its latest Investing in Asia Pacific report, UBS CIO Global Wealth Management recommended that a strategically welldiversified global portfolio across different asset classes should be the first line of defense for investors in the year ahead.
On top of acting as portfolio diversifiers and offering exposure to uncorrelated and idiosyncratic return streams, alternative investments can also reduce behavioral bias and capture illiquidity premiums.
In particular, low beta and diversified hedge fund strategies, and segments of the private market space with reduced leverage and attractive valuations are preferred.
For hedge funds, CIO believes investors should avoid exposure to single strategy and encourages a diversified approach. Low beta tactical managers are preferred over more aggressive, directional ones. Finally, given the increased macroeconomic uncertainty, relative value strategies could see more upside as they benefit from mispricing and arbitrage opportunities.
The hedge fund module in UBS Mandates has performed strongly this year, owing to a careful selection of fund managers with proven track records that consistently outperform peers. In fact, this module has outperformed not just equity and bond markets in 2018 but also the HFRX Hedge Fund reference index.
In private markets, CIO prefers less-crowded equity strategies and managers that can take advantage of opportunities spanning over multiple business cycles.