The role of alternatives in modern portfolios

UBS Asset Management alternative assets portfolio construction Alternatives

30 April 2024
| By Malavika |
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The role of alternative investments is to diversify a portfolio and capture differentiated sources of return, according to UBS Asset Management. 

Ahead of her session at the Australian Wealth Management Summit 2024, private markets partner UBS O’Connor investment specialist and head of sales and distribution for Southeast Asia, Mariana Paul, said alternatives could offer differentiated sources of alpha while providing greater downside risk protection across different market cycles.

“For a long time, the 60/40 portfolio has struggled to provide the risk-adjusted returns and diversification expected from the inverse correlation characteristics of two asset classes,” Paul told Money Management.

“This has particularly become pronounced post the GFC and then the COVID period. Analysis by UBS Asset Management showed that when inflation hits 2.5 per cent, the stock bond correlation turned positive. This may continue to be the case in the future.”

She continued: “This breakdown of the 60/40 portfolio, where you get equity returns with a bond-like risk and they’re supposed to be inversely correlated, has become one of the key push factors for investors to seek alternative sources of returns and yields away from the more traditional channels.”

Interest in alternative investments has increased since COVID-19, while hedge fund strategies like multistrategy macro trend funds have captured diverging markets across the globe, Paul added.

“This relative outperformance of alternative asset classes versus the more traditional ones in a very dynamic market, the last few years has pushed investors to look into the space more closely from an overall portfolio allocation perspective,” she said.

Investors contemplating diversifying into alternatives must consider their overall investment objective, the positioning of the alternatives within the overall portfolio, risk-adjusted returns, risk budget, target, liquidity constraints and time horizon, among other factors, Paul flagged.

Selecting the right fund manager, conducting investment due diligence and ensuring that the investor understands how returns are generated and what the associated risks are at the macro and asset class level are also critical, she said.

Alternative investments range from private equities and hedge funds to commodities and structured products.

“Typically, anything that falls outside the traditional asset classes are alternatives. Each of these strategies have different profiles in terms of risk, underlying investments, asset classes and liquidity. Hence, they provide different risk adjusted returns and investment objectives,” Paul said.

“Hedge funds should enable investors to navigate and take advantage of market dislocation when there’s economic uncertainty,” Paul observed. 

“We also believe that private markets offer a variety of opportunities to earn income and grow wealth over time, including in private equities, private credit and real estate. These are all the different objectives that you can get from the different alternative investments. It largely depends on how these fits within a portfolio and the risk appetite of the investor.”

Based on the UBS Global Wealth Management CIO office, the model portfolio has around 40 per cent allocated to alternatives, out of which 10 per cent is in hedge funds and the rest is in the private market funds like private credit, private equities and infrastructure, Paul outlined.

“This allocation to alternatives serves as a potential diversifier to the 60 per cent that is invested between equities and bonds,” she said. 

Commenting on the private markets partnership between UBS and the Australian Wealth Management Summit, Paul said it is a good opportunity for UBS Asset Management to reach both institutional and wholesale investors together in one room.

“We’re expecting that the inaugural summit will look beyond the macro and delve into a wide spectrum of investment strategies which are front of mind in the investment community in 2024,” Paul concluded.

To hear more from Mariana Paul about why alternatives must play a role in modern portfolios, come along to the Australian Wealth Management Summit 2024.

It will be held on Wednesday, 8 May, at The Star, Sydney.

Click here to book your tickets and don’t miss out!

For more information, including agenda and speakers, click here.

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