Exploring alternative investments opportunities in changing times
If 2020 state as the year of the pandemic, 2021 ended up being the year of recovery, and public markets have delivered exceptional performance over the past two years. Expectations for 2022 are still positive for the economy, but all analysts agree that the pace of economic growth will gradually decelerate over the year. Investment returns may be more complicated to achieve.
2022 already started with the surge of inflation and rising geopolitical tensions while the pandemic is still in the background. Monetary policies will likely become less accommodative but not restrictive, and markets anticipate elevated volatility mixed with muted expected returns. These conditions will make it increasingly difficult to generate stable income-driven returns and alpha through public markets alone.
As market conditions and investment strategies shift, investors must adapt. Alternative assets can provide necessary portfolio diversification, stable returns, and enhance growth.
The alternative investment universe is broad. We do not pretend to provide an exhaustive list of all alternative strategies, but the following are some investment categories of many of those available at K&B Family Office.
The opportunity of Alternative Investment & 2022 Outlooks
Alternative investments play different roles according to the economic and market cycle. Given the lowering yields and inflationary conditions, investments that can generate positive returns and provide cash flows over time are extremely important. Alternatives should be well-positioned to deliver attractive risk-adjusted returns and protect against interest rates and public markets slowdown.
For those reasons, alternative investments have raised significant interest from both investors and fund managers during the past ten years, and assets allocated to alternatives are expected to grow by 45% from 2022 to 2025:
Hedge Fund
The expected rise in volatility for 2022 forces markets to recalibrate for an unpredictable future and opens room for significant trading opportunities. Hedged fund’s structure offers managers broad flexibility to execute their mandates and allow them to take advantage of markets uncertainty while providing protection thanks to uncorrelated strategy.
The wide array of hedge funds strategies and financial instruments across global markets enable them to turn volatility into opportunity. They can provide downside protection and strategic diversification in a complex and challenging market environment, making them an essential component of a diversified portfolio.
As the VIX is already up 41% YTD, funds that focus on identifying price discrepancies among securities with similar characteristics will benefit from this situation, and long/short strategies must be able to take advantage of those tumultuous market conditions.
Global Real Estate
In an environment of rising interest rates, real estate remains a tremendous alternative source of yield and inflation protection. In 2022, investors expect many asset owners to increase rents at or above the inflation rate. This assumption is even more accurate in real estate sectors with moderate supply and robust fundamentals. We also observe a shift in the real estate business model industry that is less about ownership and more about access and operations.
Although not all sectors or geographic regions should benefit from the current economic recovery, demand for specific sectors is rising, creating shortages in some asset types and opportunities in others. Not all real estate markets are equal, quality is crucial, and identifying regional and sector-specific opportunities is critical.
Private credit
Due to regulation and capital requirements since 2008, banks have pulled back from public markets and reduced their ability to lend. This situation created a financing gap, and borrowers turned to the private market to answer their needs with relatively greater speed and certainty of execution. Retreating banks have offered investors an opportunity for greater yields than those available in public markets, and asset managers have rushed to finance liquid private debt.
Credit funds now replace traditional banking institutions and provide loans to finance diversified assets. Private debt strategies encompass leveraged finance loans, factoring, trade finance, life insurance settlements, real estate development loans, infrastructure loans, direct lending to enterprises, etc. This growing private debt market provides a stable source for good yield and low volatility in portfolios.
Private equity
Private equity markets have experienced a fast-rising activity during the last two years and demonstrated good resilience levels during periods of stress. Despite high valuations and intense competition, investor demand remains strong and distribution volume elevated. Even if fundraising agendas are getting shorter and target fund sizes larger, investments length tends to extend as private equity firms invest in businesses at earlier stages in their lives and remain invested longer.
Today, the sector keeps providing promising investment opportunities, some sectors overcoming others. One of the strongest drivers of private equity investor demand is the expectation of superior private-market returns vs. public ones. Highly skilled investors, able to drive transformational change and growth in business to create value for acquired companies, are another asset of this alternative category.
Technological innovation is among the most potent forces generating growth for this sector. A rapidly evolving world is driving disruption, and the pandemic accelerated this trend.
Investments in alternative assets are essential to diversify portfolios and mitigate the overall risk across investments. Thanks to their low correlation to public markets, they can counter market downturns. Many alternative assets also provide a hedge against inflation, which is highly valuable in today’s conjuncture.
Access to alternative investments can expand your long-term investments options.
For more information, please contact kb-trading@kbfamilyoffice.com.
Louise Laborde
Chief Operating Officer
Please contact us if you have any question or concern.
