WHEN the going gets tough, investors turn to alternative investments - at least that is what a number of advisers are hoping to persuade their clients to consider.
The argument for an allocation into alternative assets is typically one of diversification. That is, alternative assets - which include hedge funds, real estate, private equity and other fairly illiquid assets - should boast a relative low correlation with mainstream asset classes. An allocation can thus help to dampen a portfolio's overall volatility and still enhance returns.
Until recently, it was an uphill climb to persuade investors to make an allocation while Asia and the emerging market were basking in an extended bull market. The credit crunch and worries over a US recession have since dampened markets. Man Investments executive director Timothy Peach says: 'Hedge funds never look good in a bull market. Our fees are higher and performance not as attractive as going long equities. Where we add value is when markets turn sour and investors experience significant losses. Hedge fund losses shouldn't be as significant.
'We're seeing a trend of increased interest. . . Our flows as a regional business in March are as good as we've seen for the last 12 to 24 months.'
He adds: 'Investors know they cannot generate the same returns as they did before through equities or equity structured products. They're beginning to be more sanguine in their expectations of how much returns they can achieve in the next few months or years.'
In this week's edition of Executive Money, we highlight a number of alternatives that may be worth a second look - currencies and distressed funds. Keep in mind, however, that you will need to stay invested for at least three years. And if you are considering a distressed debt fund, liquidity may be an issue as funds offer quarterly liquidity at best.
Mr Peach says: 'One of the biggest challenges here is to educate clients that if they are prepared to be less liquid, they will benefit with returns. You can keep cash for short term liquidity, and you should be prepared to invest in longer term investments to pick up a higher yield.'
This article was first published in The Business Times on May 14, 2008
