Due to their distinct characteristics, we take a differentiated look at selected liquid and illiquid alternative investments. 1
We maintain a positive view on equity-market-neutral managers, both from a structural multi-asset standpoint and from a tactical perspective. Equity-market-neutral strategies generally delivered good risk-adjusted returns throughout most of 2015 and proved an effective diversifier in periods of market stress. Market dispersion continues to be conducive to good performance, especially when looking at the performance differentiation between equity-sector clusters, which has recently increased in both the STOXX Europe 600 Index and the S&P 500 Index.
The current environment could be particularly fertile for discretionary (i.e. manager-determined) macro and systematic CTA managers. Opportunities include a renewed acceleration in oil- and commodity-price declines, clear dynamics in U.S. dollar foreign-exchange pairs with emerging-market (and some developed-market) currencies and the possibility of trading equity markets from the short side. We feel that a significant allocation to strategies which are generally agnostic to bottom-up fundamentals – and can take increasing short positions in risky assets as volatility rises – could benefit overall risk-adjusted returns in the context of a less supportive market backdrop.
Infrastructure-investment valuations have risen over the past few years as the increasing availability of debt financing, investors’ hunt for yields and an improving macro backdrop have all stimulated demand. However, opportunities for investment at reasonable prices remain in the less competitive markets for medium-sized operations.
Prospects remain particularly favorable in Europe, which combines a good investment environment with a transparent legal and regulatory framework and a long history of private ownership of infrastructure. A diverse mix of investment opportunities is also on offer, ranging from the fast-growing economies of emerging Eastern Europe to the larger and more mature economies of Western Europe. At a sector level, energy could provide significant opportunities during 2016 due to structural shifts in electricity generation. Climate-change policies should also provide support for the renewable-energy sector in Europe, in particular in the United Kingdom, Germany and France.