The coronavirus pandemic is presenting a myriad of challenges to asset allocators, but one area that’s proving sturdy is actively managed alternative strategies.
Alternative managers employ long-short strategies, hedge fund replication, managed futures, global infrastructure, merger & acquisitions, private equities, and Treasury spread investments, among others.
“Investors are allocating the same amount of their portfolios to alternatives year-over-year, but allocations continue to shift as private equity (26% of allocators’ alternatives exposure), real estate (26%) and private credit (11%) grow, and hedge fund allocations (23%) contract,” according to EY.
Some active alternative funds hold a combination of equities, along with financial future contracts, forward currency contracts and other securities while others feature a diversified mix of alternative strategies, including multiple hedge fund investment styles, such as long/short equity, global macro, market neutral, event-driven, fixed income arbitrage and emerging markets.
Impressive Pandemic Performance
“Despite extreme levels of market volatility, increased trading volumes and disruptions to society due to COVID-19, alternative fund managers persevered, and even exceeded, performance expectations from investors,” notes EY.
Potential investors should be aware that alternative investments are not meant as growth strategies to generate outsized returns in investment portfolios. In reality, these strategies are doing exactly what they were made for: diminishing volatility. Consequently, in bullish market conditions, the strategies may underperform, but if the markets turn, alts can shine.
Alternatives would be used in an investment portfolio to provide diversification from equities or better protect an investor from downside risks in stocks while bringing some upside participation. Nevertheless, these alternative strategies may include equity exposure, so in a widespread sell-off, investors should not expect complete immunity.
“The alternative funds industry rose to the occasion surrounding the COVID-19 pandemic in terms of investors’ expectations and managerial performance. Investors generally felt that their alternative fund managers either met or exceeded their performance return expectations, with 58% of hedge fund investors and the majority (81%) of private equity investors noting that their managers met or exceeded performance expectations during the market volatility that occurred as a result of the pandemic,” according to EY.
For more on active strategies, visit our Active ETF Channel.