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Alternatives: Tools for a diversified portfolio

In this rapidly evolving market environment, it is not surprising that asset allocations for institutions are expected to follow suit and undergo many changes in the near term. Institutional investors worldwide are anticipating more asset allocation changes in the next one to two years than in 2012 and 2014, according to the Fidelity Global Institutional Investor Survey. Now in its fourteenth year, the survey indicates that 72% of institutional investors plan to increase their allocation of illiquid alternatives in 2017 and 2018.

Alternative investments can be used alone to address unique investment objectives, or together within a portfolio to complement other strategies that have different risk and return profiles. We believe that investing in alternatives can offer a range of benefits to investors, including the potential for uncorrelated returns, reduced volatility and, in some cases, additional tail risk protection. Investments in real estate and infrastructure also have the potential to generate sizable yield. In this paper, we will look at a variety of alternative investment strategies and the potential strengths they have when added to a diversified portfolio.

Private Equity & Venture Capital

Private equity and venture capital have always offered the potential for outsized returns compared to public markets, but investors should consider focusing on certain areas of the market to maximize the utility of these asset classes. Smaller deal sizes in private equity and earlier stage investments in venture capital offer a significant opportunity to generate outsized returns, provided that investors conduct thorough research and due diligence.

Real assets: Mid-stream energy and timberland

Within real assets there are several sub-asset classes including: energy (including upstream and midstream oil and gas, power, and infrastructure assets), mining and minerals, timber, and agriculture. This diversity adds complexity, and investors should consider partnering with an experienced and skilled team to be able to identify particular investment themes and opportunities and match them with the right general partner (GP) or operator to fully exploit the opportunity.

Infrastructure

Private infrastructure capital needs have increased as global governments work to rebuild or advance their countries. Mature infrastructure assets can provide stable income over the long-term, while growth and development infrastructure assets can generate strong capital appreciation. Across these lifecycles, infrastructure is a fast-growing asset class that may be enhanced with proper active management.

Hedge funds

Global economic uncertainty has renewed investor interest in hedge funds. Hedge fund assets include an array of strategies that can help diversify risk while generating returns. But not all hedge funds are the same, which means thorough due diligence and a deep understanding of individual strategies may be critical in making advantageous investments.

Property multi-manager

Property can be an important source of diversification within a multi-asset portfolio. In today's “lower for longer” interest-rate environment, it is one of the few asset classes that can still offer opportunities for significant yield, as well as the potential for growth.

Conclusion: intelligent diversification

Alternatives offer a vast array of different strategies and styles to fit a variety of investor risk and return objectives. Each alternative investment strategy has unique characteristics that make it well-suited for its purpose. That purpose may be to generate new sources of alpha within a portfolio, mitigate risk in distressed markets or unlock new opportunities within a largely unconstrained investable universe.

While the use of alternatives has become much more widespread in recent years, investors should keep in mind that these are complex strategies, and as such they require an in-depth understanding gained through extensive and often time-consuming research. Partnering with an institutional alternatives platform can offer the resources needed to identify complementary strategies for a diversified portfolio.

Having an allocation to one or more alternative strategies is like having a specialized toolkit to help you with your goals. Finding the right strategies for your objectives and deciding upon an appropriate allocation within your portfolio can help you enhance a diversified allocation and gain new sources of investment returns. With alternatives, there are a variety of solutions that investors can employ to diversify their portfolios.

IMPORTANT INFORMATION
PAST PERFORMANCE IS NOT AN INDICATION OF FUTURE RESULTS.

   Alternative investments involve specific risks that may be greater than those associated with traditional investments; are not suitable for all clients; and intended for experienced and sophisticated investors who meet specific suitability requirements and are willing to bear the high economic risks of the investment. Investments of this type may engage in speculative investment practices; carry additional risk of loss, including possibility of partial or total loss of invested capital, due to the nature and volatility of the underlying investments; and are generally considered to be illiquid due to restrictive repurchase procedures. These investments may also involve different regulatory and reporting requirements, complex tax structures, and delays in distributing important tax information.
   The above is for informational purposes only and should not be considered as an offer or solicitation to deal in any of the investments mentioned herein. Aberdeen Asset Management (AAM) does not warrant the accuracy, adequacy or completeness of the information and materials contained in this document and expressly disclaims liability for errors or omissions in such information and materials.
   Some of the information in this document may contain projections or other forward-looking statements regarding future events or future financial performance of countries, markets or companies.
   These statements are only predictions, and actual events or results may differ materially. The reader must make his/her own assessment of the relevance, accuracy and adequacy of the information contained in this document, and make such independent investigations as he/she may consider necessary or appropriate for the purpose of such assessment.<
   Any opinion or estimate contained in this document is made on a general basis and is not to be relied on by the reader as advice. Neither AAM nor any of its agents have given any consideration to nor have they made any investigation of the investment objectives, financial situation or particular need of the reader, any specific person or for any loss arising whether directly or indirectly as a result of the reader, any person or group of persons acting on any information, opinion or estimate contained in this document.
   AAM reserves the right to make changes and corrections to its opinions expressed in this document at any time, without notice.
   In the United States, Aberdeen Asset Management (AAM) is the marketing name for the following affiliated, registered investment advisers: Aberdeen Asset Management Inc., Aberdeen Asset Managers Ltd, Aberdeen Asset Management Ltd, Aberdeen Asset Management Asia Ltd and Aberdeen Capital Management, LLC. Excluding Aberdeen Capital Management LLC, each of these advisers are wholly owned by Aberdeen Asset Management PLC. Aberdeen Capital Management LLC is a wholly-owned subsidiary of Aberdeen Asset Management Inc. “Aberdeen” is a U.S. registered service mark of Aberdeen Asset Management PLC.
    Aberdeen Asset Management (“AAM”) is the marketing name in Canada for the following affiliated entities: Aberdeen Asset Management Inc., Aberdeen Fund Distributors, LLC, Aberdeen Asset Management Asia Ltd, Aberdeen Asset Management Canada Limited and Aberdeen Capital Management, LLC. Aberdeen Asset Management Inc. is registered as a Portfolio Manager in the Canadian provinces of Ontario, Nova Scotia and New Brunswick and as an Investment Fund Manager in the provinces of Ontario, Quebec, and Newfoundland and Labrador. Aberdeen Asset Management Asia
   Limited and Aberdeen Asset Management Canada Limited are registered as Portfolio Managers in Ontario. Aberdeen Fund Distributors, LLC, operates as an Exempt Market Dealer in all provinces and territories of Canada. Aberdeen Fund Distributors, LLC, Aberdeen Asset Management Canada Limited and Aberdeen Capital Management, LLC, are wholly owned subsidiaries of Aberdeen Asset Management Inc. Both Aberdeen Asset Management Inc. and Aberdeen Asset Management Asia Ltd. are wholly owned by Aberdeen Asset Management PLC.

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This content is published by the P&I Content Solutions Group, a division of Pensions & Investments, in collaboration with Aberdeen Asset Management. The content was not written by the editors of the newspaper, Pensions & Investments, and does not represent the views of the publication, or its parent company, Crain Communications.