Industry Insights

Alternative strategies: rethinking the 60/40 portfolio

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The global alternatives market not only weathered the storm created by rising US interest rates, China’s economic downturn and geopolitical crisis, but is expected to emerge stronger in 2023.

A recent investor survey by UBS revealed that as interest rates are likely to rise next year, nearly a third of the wealthy respondents planned to add alternatives to their portfolios.

This has been a ‘year of reckoning’ for investors when the adage of 60/40 balanced portfolio doesn’t work, creating a place for alternatives in investors’ portfolios, according to Marie Chew (pictured, left), head of investment funds and alternatives, advisory and sales, Southeast Asia, UBS Global Wealth Management (GWM).

‘We expect this shift to alternatives to continue and overall allocations in alternatives to increase,’ she added.

According to the 2022 Preqin global alternatives report, the AUM across all alternative asset classes will likely accelerate 11.7% and reach $23tn in 2026.

Stabiliser effect

Driven by various factors, alternatives acted as a stabiliser in portfolios last year. ‘First, as volatility, macroeconomic and geopolitical problems impacted the public markets worldwide, Asia’s ultra-high-net-worth individuals (UHNWIs) were diversifying and entering the alternatives market to generate alpha in their portfolios. Second, they achieved optimal risk-adjusted returns in comparison with public assets,’ said Chi Man Kwan, chief executive officer and founder, Raffles Family Office.

He said that his clients had significantly increased allocation to alternatives and currently 20-25% of assets managed by the multi-family office were in non-traditional products, such as private equity, private credit and real estate.

Clients generally look for diversification benefits from alternative investments as they have lower correlations to traditional long-only assets such as equities or bonds.

‘With both stocks and bonds down, and with their correlations becoming increasingly positive, we also observe that clients’ portfolios with higher alternative investments are able to reduce their portfolios’ volatility as well,’ explained Paula Ip (pictured, right), head of investment funds and private markets, Greater China, UBS GWM.

Product preferences

In particular, Asian investors have an affinity to real estate and fixed income products. However, in recent times, they have also been investing in private equity, raising their risk-return profile.

Private equity has also emerged as a new asset class in the family office space. ‘Not only does it provide diversification and alpha but it allows family offices to acquire controlling stakes in companies that might be beneficial to their family businesses,’ said Kwan.

While the internet and technology sectors remained the most appealing, Apac markets were seeing private equity capital flowing into companies in the healthcare sector. Interestingly, there was also an increase in portfolio allocation to cryptocurrencies by family offices in the region, he added.

Paul Ong, partner, InnoVen Capital SEA, maintains that although wealthy people may have already invested significant capital into alternatives in recent years, there may be a shift to strategies that have greater liquidity, such as private credit and venture debt.

‘This is because regular coupon distributions and shorter redemption cycles provide investors more flexibility to take advantage of potential attractive valuations in the public markets,’ he said.

Asian investors were also changing their strategy for hedge funds, which in general were suffering a dire year. Instead of focusing on equity long-short funds, they were switching to more diversified portfolios of hedge funds, including multi-strategy, relative value, credit and macro/trading styles, said Chew.

Next generation risk-takers

As trillions of dollars are expected to change hands in Asia due to an intergenerational wealth transfer, the younger rich tend to have a higher risk profile and longer investment horizons, making them open to alternative investments.

Being educated overseas, they often have different priorities than their parents, such as the desire for greater transparency and control. ‘They aren’t solely focused on generating returns but want to adopt a more hands-on approach and actively take part in the expansion of the companies they invest in, which ultimately private markets give them,’ said Kwan.

As the wealth transitions to them, the younger generation also want to control the allocation of their money, with hopes of having a positive impact on society.

Indeed, sustainable investing was an important theme in alternative investments, as wealthy individuals became more aware of its long-term benefits in being able to earn financial returns and do some good at the same time, said Ip.

Rise of private wealth buyers

Increasingly, therefore, alternative asset managers have woken up to the potential of wealthy clients, with fund managers pitching these investments to them.

Partners Group has been the latest to set up a private wealth division, following the likes of Blackstone, Apollo, KKR and Ares Management, with dedicated teams to distribute their products through this channel.

‘Individual investors are increasingly looking to gain exposure to the growing portion of the real economy that can only be accessed through private markets,’ according to Partners Group.

The bottom line, said Blackstone’s head of private wealth solutions, Joan Solotar, was that the size of the high-net-worth market was as big as institutional wealth, and was still largely untapped.

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