Alternative assets are hot topics in the investment sector - not only because they represent new return opportunities. More relevantly in today’s environment, they can also create “distance” from the highly sensitive markets.
What is the best possible combination of investment alternatives for compiling an optimal portfolio? Investors should ask themselves this question when making every investment decision. This consideration has become even more essential in today’s market, which is fraught with a severe level of price volatility. It is no longer just about increasing the return opportunities but also making use of an effective risk reduction. The legendary financial economist Harry M. Markowitz once said that cleverly combining different assets and financial instruments minimizes portfolio risk without reducing the expected return. Markowitz’s portfolio theory won him the Nobel Prize in Economics back in 1990. It has become the key principle for each person who studies finance - and also the foundation for actively managed investment portfolios.
Up until now, alternative investments have been used primarily to improve the earnings side without worsening the overall risk. This was due to the well-known and never-ending shortage of sources of return. However, the recent market upheavals in the wake of the corona crisis raise additional questions: What assets can still be classified as being alternative assets? And which of them should be considered? Notably, Markowitz's theory only works on the premise that the investments in a portfolio do not correlate with each other, or if they do correlate, do so only slightly. In today’s market, however, price correlations have occurred where no one would have previously expected. The reason: the increasing roles of the psychological component in (liquid) capital markets, macro-economic influences, and central bank interventions.
Once again, theory and practice have proven to be two different things. What should be done? The answer is to continue to rely on alternative investments to defray some of the risks of the highly sensitive markets. Many experts are predicting a continuing trend towards alternative investments, such as private equity, private debt, infrastructure or real estate. Recent analyses have shown that some of these investments have declined less in value in times when stock market prices are turbulent, yielding positive returns again earlier on. Currently, valuations should be treated with the greatest of caution as in this climate, they are only reliable under certain circumstances. But it is precisely this current valuation dilemma that has also the potential to end up being an advantage for this reason: Private market investors will probably not develop "shaky hands" and should therefore not be inclined towards panic selling. If you keep a cool head, you might find promising investment opportunities, as well as new alternative assets at interesting entry-level prices. Specialized investors with appropriate expertise are on a new playing field.
Either way, it should be worthwhile to stay away from the highly liquid capital market. The non-bankables, which are only slightly liquid or not liquid at all, not only open up a completely new investment horizon with no limits on a thematic level, but they are also less prone to panic in the markets and therefore allow a return to more pragmatism. Let us refine Markovitz's concept of success with the modern possibilities available to us today.
Check out the full article in German (that has appeared on investrends.ch):
You might also be interested in this: Alternative assets - only alternative or already first choice? (DE)