Investing in 'alternatives'

The 'what' and 'why' of alternatives

A recent international study by Willis Towers Watson focused on US$33 trillion of pension fund assets in 7 countries (Australia, Canada, Japan, Netherlands, Switzerland, US and UK).  They found that across portfolios an average of 24% was invested in assets classified as “other/alternative” - a staggering jump from 7% in 1996.  By contrast equity allocations have gone down from 52% to 44% over the same 19-year period.   The rationale for alternatives is well understood, it is about risk and return:

• Portfolio diversification across asset classes reduces risk (by introducing assets not expected to be correlated with equities or bonds)
• Higher returns may be achieved from difficult to access markets or through more complex alternative strategies

Below we look at PIE fund options for NZ investors in alternative assets by reviewing hedge funds, private equity, commodities and other 'alternative strategies (we will save real estate for a future commentary)'.

Multi-asset hedge funds
Multi-asset hedge funds invest across a range of asset classes – equities, fixed income, commodities and credit.  They can also cover a broad geography (i.e. both developed and emerging markets).