Alternatives may contribute to more efficient portfolio construction

Improvements in access, liquidity, and transparency are making Alternative Investments increasingly accessible for retail investors.

Where’s the Smart Money Going?

Because of uncertain bond yields, extreme central bank intervention, and uncertainty in the stock markets, the most sophisticated investors in the world are allocating more of their assets to Alternative Investments. They believe that Alternative Investments will give them a better chance of achieving sufficiently high returns to meet future cashflow obligations while protecting against excessive downside.

CPP 2023 ALLOCATIONS

*CPP Credit allocation of 13% is estimated to be comprised of 10% private debt and 3% public credit investments from 2023 CPP Annual Report
Source: CPP Investments Annual Report F2023

What are Alternative Investments?

Generally speaking, Alternative Investments are any asset class that is not among the three traditional asset types (stocks, bonds and cash) and are used, among other objectives, to more fully diversify a portfolio.

The Role Alternative Investments May Play in a Portfolio

When well-managed, Alternatives have the potential to complement core equity and fixed income allocations by improving diversification, managing risk, providing income, and enhancing returns.

A professional asset allocator can help determine if Alternative Investments will help a portfolio achieve its investment goals.

The Goal of Alternative Investments

Alternative Investments permit more efficient portfolio construction with the potential to deliver on a range of desired outcomes:

• Portfolio diversification
• New sources of income
• Enhanced returns
• Volatility & drawdown management
• Interest risk management
• Inflaton risk management

Market Factors Driving Interest in Alternatives

Several factors are driving interest in Alternative Investments among sophisticated investors:

• Uncertain market growth and inflation may lead to higher correlations between traditional asset classes, exposing a portfolio to greater risk
• Uncertain interest rates. While yields have come up, investors are still looking for diversified sources of income.
• Creeping portfolio risk. As investors sought higher income in their portfolios, they have looked to high yield bonds, dividend paying equities, and preferred shares – which may increase portfolio risk.
• Uncertainty concerning the market cycle.

   

  
  Source: Morningstar and St. Louis Fed (FRED), October 2023.

   

  ---

   

  Common Risks and Offsets for Retail Investors

  While the definition of Alternative Investments has broadened, “Alts” still suffer from the perception of being high-stakes, high-torque hedge funds.

  Today’s hedge funds are more focused on risk management, while the broader set of Alternative Investments to which they belong are designed to provide stability to a portfolio through better diversification.

  That said, for retail investors interested in Alternative Investments, there are some important considerations:

  Access: In the past, investing in Alternatives required significant investment minimums. Today, a range of funds are available to give retail investors exposure to Alternative asset classes, with varying degrees of risk that a financial advisor can best assess.

  Liquidity: Some Alternative Investments, such as Private Debt and Private Equity, are best-suited to investors who can support an allocation of less-liquid investments in their portfolios. That said, investors may want to explore Liquid Alts which provide many of the benefits of Alternatives but offer daily liquidity.

  Transparency: Many Alternative Investments are privately traded, so there is limited information available on pricing, track records, and comparability (benchmarks). Good manager selection can help here, as can the visibility offered by Liquid Alt products. In all cases, please consult the applicable product offering documents for full disclosure of risk factors.