Due to their distinct characteristics, we take a differentiated look at selected liquid and illiquid alternative investments.1
We think that both discretionary global macro and systematic/commodity trading advisor (CTA) strategies can bring to a portfolio a useful, idiosyncratic and diversifying risk-return profile. As equity markets have rebounded, the correlation of these types of strategies to the MSCI World Index has remained firmly negative, which suggests they could prove to be an effective source of diversification, should equity-market sentiment deteriorate again. In regard to global macro strategies, those focused on inter-asset-class relationships and geographic dispersion look particularly interesting. Commodities, equity indices, bonds and credit indices all offer distinct sets of opportunities. The United States, Europe and emerging markets have been exhibiting different patterns since the indiscriminate sell-off at the beginning of the year. CTAs could well profit from any renewed weakness in equity markets, while also capitalizing on another wave of flight to quality through long positions in U.S. Treasuries.
Total capital raised followed the usual seasonal slowdown in the first quarter of 2016, dropping back to $66 billion. However, the proportion attributable to buyouts rose to its highest in any first quarter of this decade, with $39 billion aggregate capital raised. Dry powder remains high with $775 billion in capital available as of March. This is contributing to stubbornly high valuations, with private-equity acquisition multiples remaining above the 10-year average for all deal sizes in Europe and for medium and large deal sizes in the United States. Fundraising is expected to remain generally healthy in Europe for the remainder of the year, despite political risks, but private-equity deals in the U.K. have fallen to levels not seen since 2008.
Investor demand is still healthy for unlisted infrastructure, helping valuations for the asset class to remain broadly above their long-term average. Deal flows have continued to grow in the first quarter of 2016 with 224 deals completed. Asia’s share rose to 37% of the global reported deal value. However, the inherent commodity exposure of many sectors in the region still presents risks, as could China. Economic fundamentals are also a headwind for unlisted infrastructure in the United States, though pockets of opportunities remain. Utilities can provide long-term, stable cash flows, that when coupled with fair valuations make this sector look interesting amidst continued global uncertainty.
1 These portfolios may not be suitable for all investors.
2 Not available in discretionary portfolios. Hedge funds and other investments classified as non-mainstream pooled investments are not considered as suitable investments for retail clients in the United Kingdom. Illiquid investments may be difficult to acquire or dispose of. The product’s ability to respond to market conditions may be impaired and investors may experience adverse price movements on liquidation.