Liquid alternatives in multi-asset portfolios: Smoke and mirrors or a true paradigm shift?

Executive summary

Lower expected returns and elevated uncertainties pose a challenge to investment professionals that find themselves puzzled by a search for return and diversification. In this paper, we argue that there is a viable solution to this problem: alternative investments in a multi-asset context. Enhancing portfolios with exposures to alternative investments can complement existing allocations and puts investors in the position to persist in the challenging market environment ahead.

Alternatives span a broad investment universe, ranging from traditional liquid alternative assets classes to established private market investments. This paper however focuses on liquid alternative cross-asset strategies. We show that these strategies can have very different and unique characteristics which can complement and enhance existing asset allocations.

Selected challenges associated with these investments are highlighted that lead to one of our core principles: know your premia. Examples of the various objectives to use liquid alternative strategies are presented, from structural return enhancement to diversification to strategic downside protection. Different use cases require different liquid alternative solutions.

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