Seeking refuge in alternatives

Meanwhile, the more aggressive Barclays Wealth — the wealth management division of Barclays Bank — has also recently recommended clients around the world to increase allocation to alternatives to as much as 75–100% of their overall portfolios. “We are now rolling out a new investment philosophy around the world and asking clients to put more money in alternatives with absolute-return strategies,” says Mads Pedersen, head of asset allocation at Barclays Wealth.

The exposure to alternatives “can go all the way up to 100%” of a client’s portfolio, says the London-based Pedersen, who visited Singapore in March. He adds that, for most clients, the relevant allocation is between 25% and 75%. “Given the spectrum of absolute-return strategies that we have, we are happy to advise clients to have up to 75% of their portfolios in alternatives such as those with low-risk absolute-return strategies.”

Given the widespread volatility in traditional asset classes such as equities this year, an investment portfolio with higher exposure to alternatives could provide clients with “a smoother path” towards in-vestment gains over the short term, Pedersen reasons. This is particularly helpful for investors who are unwilling to tolerate the negative or volatile performance of a traditional market-return portfolio.

During strong bull markets like those in recent years, where equities outperform most other asset classes, some clients had been disappointed with absolute-return investments, says Pedersen. “But we do not expect absolute return strategies to yield the same type of returns as equities in a bullish year.” In a weak year for equities, however, alternative investments do give “a lot of protection”, he adds.

Some experts also point out that, besides offering investors portfolio diversification and protection in the short term, alternatives can also help boost the overall returns of an investment over the long term, with much less volatility than a traditional mix of equities and bonds.

Banks have been structuring products to allow their wealthy clients to invest directly in farmlands around the world.

Banks have been structuring products to allow their wealthy clients to invest directly in farmlands around the world.

Indeed, big investors of alternatives such as US university endowment funds have generated consistent and above-average returns over the past decade, regardless of the market cycle of bonds and equities.

For instance, the Yale University endowment fund, managed by chief investment officer David Swensen since 1985, has gained an annual average of 17.8% over the past 10 years by allocating more than 60% of its assets in alternatives such as hedge funds, private equity, real estate and timber. The fund, which generated 28% last year, made the headlines in 2000 when it turned in a whopping 41% that fiscal year, which saw a big correction in global equities on the back of the Internet stock bubble burst.