Bonn, 4th October 2018. From the point of view of the Bundesverband Alternative Investments e.V. (BAI), the central advocacy association for the alternative investment industry in Germany, private and institutional investors should focus on portfolio hedging. So-called liquid alternatives play an important role here, especially because indications of higher equity market and interest rate risks are compounding.
In terms of the unambiguous interest rate policy of the FED in the US and a changing global economy, institutional investors need to adjust their portfolios. In the industrialized countries, the economic momentum continues to decline, the trade disputes between the US and China have reached a new dimension, Italy challenges - once again - with a questionable and dangerous debt policy the EU and especially the euro zone. And last but not least: the German regulator BaFin warns of bubbles in the capital and real estate markets and at the same time criticises lax bank lending standards.
Regarding these warnings and circumstances one can observe increasing interest in liquid alternatives. They provide access to alternative investment strategies in regulated and liquid structures often related to Absolute Return or hedge fund strategies with a focus on risk management and risk mitigation. Those strategies seek exposure to specific risk premia of tradition asset classes (e.g. risk parity strategies) or with regard to alternative asset classes (e.g. alternative beta strategies). The overall objective is to achieve uncorrelated returns from equity and bond market developments by employing asymmetric risk-return profiles. In consequence they complement the traditional asset allocation and are also designed to mitigate the risk of losses.
BAI-Managing Director Frank Dornseifer evaluates the rising demand for liquid alternatives as follows: “Especially with regard to cyclical, geopolitical and other risks that are currently materialising, more comprehensive risk management and, above all, the use of hedging strategies is become more relevant and this is exactly one aspect liquid alternatives can be used for. In addition to the use of long / short strategies - also in the UCITS format – as well factor-based strategies are employed, especially outside the traditional long-only approaches.”
In recent years, institutional investors have focused on illiquid alternative investment strategies such as private equity, infrastructure or private debt, which are often summarized under the generic term private markets. At the same time, traditional liquid and long-only strategies were well performing and often exceeded many hedge fund strategies. Reduced return prospects on traditional markets and the above-mentioned macro scenarios have now initiated a trend reversal, which is particularly noticeable in the portfolio composition of institutional investors.
Dornseifer mentioned in addition: “Whether factor-based strategies or long / short approaches, we see dynamic growth in all areas of liquid alternatives. A shift is taking place among investors both from the fixed-income portfolio and from the cash holdings. Not all investors can and want to continue to over-weight strategies such as private equity, infrastructure or private debt alone, but liquid strategies contin-ue to be an essential part of any portfolio, especially if macro conditions change.”
More information regarding liquid alternatives you can find on our BAI-Homepage and the new section “main topics”: bvai.de/en/main-topics-of-the-association-work.html
download the press release here
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