Key Takeaways
- • BCG Consulting Group's recent study found that assets under management in alternative investments have grown faster than any other investment category except passive strategies, according to the Invezz article.
- • A Brigham Young University study using secondary market transaction data found private equity has delivered high equity beta and low alpha, meaning returns have tracked market volatility rather than generating excess returns.
- • The article argues alternatives provide genuine diversification mainly when managers deliver true alpha across a varied set of alternative risk premia and hedge fund strategies rather than relying on equity beta.
- • The HFRI Indices are cited as showing that strategies with equity beta below 25% have proven beneficial.
- • Investors are urged to scrutinize the real sources of manager performance ahead of 2020, given vulnerability to corporate-sector shocks and rising corporate finance costs.
Summary
Alternative investments have gained popularity over the last 15 years as investors look beyond traditional assets for diversification and higher returns. According to a recent study by BCG Consulting Group cited by Invezz, assets under management in alternative assets have risen faster than any other investment category except passive strategies. The article stresses that alternatives are not a cohesive group, so a one-size-fits-all approach will not work, and investors should conduct thorough due diligence before selecting an option.
The article contends that market exposure alone does not protect against downturns. Citing a Brigham Young University study that used secondary market transaction data, it reports that private equity has delivered high equity beta and low alpha, making it highly sensitive to market volatility without generating excess returns. According to the article, the historically high total returns of private equity and buyout funds stem largely from very high debt levels, which explains their market correlation.
The article argues that genuine diversification is achievable, and that some managers have delivered value-added alpha. It points to strategies spanning a varied suite of alternative risk premia and hedge fund approaches as a way to benefit without relying on equity beta. Over time, the article suggests, alternatives should be able to deliver near-zero net exposure to traditional equity and fixed income markets. The HFRI Indices are cited as evidence that strategies with equity beta below 25% have proven beneficial.
Looking to 2020, the article describes markets as vulnerable to shocks, particularly in the corporate sector. It warns that if buyback-fuelled equity growth slows amid rising corporate finance costs and declining margins, markets could quickly move into bear market dynamics. Combined with the current state of fixed income markets, the article says there is real value in adding diversifying sources of return. It concludes that investors should not generalize about alternatives but scrutinize the real sources of managers' performance to align goals with strategy.
The article contends that market exposure alone does not protect against downturns. Citing a Brigham Young University study that used secondary market transaction data, it reports that private equity has delivered high equity beta and low alpha, making it highly sensitive to market volatility without generating excess returns. According to the article, the historically high total returns of private equity and buyout funds stem largely from very high debt levels, which explains their market correlation.
The article argues that genuine diversification is achievable, and that some managers have delivered value-added alpha. It points to strategies spanning a varied suite of alternative risk premia and hedge fund approaches as a way to benefit without relying on equity beta. Over time, the article suggests, alternatives should be able to deliver near-zero net exposure to traditional equity and fixed income markets. The HFRI Indices are cited as evidence that strategies with equity beta below 25% have proven beneficial.
Looking to 2020, the article describes markets as vulnerable to shocks, particularly in the corporate sector. It warns that if buyback-fuelled equity growth slows amid rising corporate finance costs and declining margins, markets could quickly move into bear market dynamics. Combined with the current state of fixed income markets, the article says there is real value in adding diversifying sources of return. It concludes that investors should not generalize about alternatives but scrutinize the real sources of managers' performance to align goals with strategy.
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