Key Takeaways
- • Crestone Wealth Management's Rob Holder argues that with the equity cycle late and traditional returns expected to be "relatively muted," investors should hold a neutral equities weighting and an overweight position in alternatives.
- • Financial planner James Ridley of Atlas Wealth Management says balanced to high-growth investors may target 5 to 20 per cent direct allocations to alternatives, depending on risk tolerance and timeframe.
- • Sherbrook Private's Andrew Lord cites the Future Fund's roughly 47.6 per cent allocation to alternatives or illiquid assets, illustrating how alternatives are becoming mainstream among institutional allocators.
- • Liquidity remains the key trade-off: private equity funds may carry seven-year-plus lock-ups, while some hedge funds offer monthly redemptions.
- • Holder recommends a fund structure as the most realistic route for individual investors, with diversified fund of hedge funds at the lower-risk end and private equity and venture capital at the higher-risk end.
Summary
Following a sharp October sell-off and continued volatility in early 2019, Morningstar Australia reports that alternative investments may merit renewed consideration as falling stock valuations prompt a rethink of absolute return strategies. Hedge funds and absolute return funds, which aim for positive or less volatile returns in rising and falling markets, are cited alongside private equity, early-stage equity, commercial mortgages, property and infrastructure as key alternative exposures.
Rob Holder, an asset allocation specialist at Crestone Wealth Management, says that at this late stage of the equity market cycle, returns from traditional asset classes are expected to be "relatively muted" in the period ahead. He recommends a neutral equities weighting paired with an overweight position in alternatives, and suggests a fund structure as the most realistic option for individual investors. He notes that a diversified fund of hedge funds sits at the lower-risk end of the alternatives spectrum, while private equity and venture capital sit at the other end of the risk and return scale.
James Ridley, a financial planner at Atlas Wealth Management, says allocation levels depend on factors such as risk aversion and investment timeframe. Generally, he says, balanced to high-growth investors will target direct alternatives investments of 5 to 20 per cent.
Andrew Lord, director at Sherbrook Private, says allocators have been slow to adopt alternatives but the asset class is becoming mainstream. He cites the Future Fund, which he describes as allocating 31 per cent to equities, 7 per cent to property and 14.4 per cent to cash, with 47.6 per cent to alternatives or illiquid assets, a figure he says exceeds 50 per cent when the heavily illiquid property allocation is taken into account. Sherbrook runs client portfolios with as little as 10 to 20 per cent in listed assets and cash, with the majority in alternatives, and can access hedge funds with minimum investments of $1 million-plus by pooling client funds through special purpose vehicles. Lord reports 12.7 per cent per annum returns averaged over seven years with zero defaults for its debt investments, which span property, peer-to-peer lending, livestock lending, disbursement funding and unlisted corporate credit.
Liquidity is the central trade-off. Holder notes that alternatives are often, though not always, less liquid than traditional assets, and a large private equity commitment may carry a seven-year-plus lock-up. Lord counters that some alternatives have defined terms, such as mortgage-backed securities maturing over one to two years, or hedge funds with monthly redemptions, and argues that clients now appreciate how illiquidity reduces portfolio volatility.
Rob Holder, an asset allocation specialist at Crestone Wealth Management, says that at this late stage of the equity market cycle, returns from traditional asset classes are expected to be "relatively muted" in the period ahead. He recommends a neutral equities weighting paired with an overweight position in alternatives, and suggests a fund structure as the most realistic option for individual investors. He notes that a diversified fund of hedge funds sits at the lower-risk end of the alternatives spectrum, while private equity and venture capital sit at the other end of the risk and return scale.
James Ridley, a financial planner at Atlas Wealth Management, says allocation levels depend on factors such as risk aversion and investment timeframe. Generally, he says, balanced to high-growth investors will target direct alternatives investments of 5 to 20 per cent.
Andrew Lord, director at Sherbrook Private, says allocators have been slow to adopt alternatives but the asset class is becoming mainstream. He cites the Future Fund, which he describes as allocating 31 per cent to equities, 7 per cent to property and 14.4 per cent to cash, with 47.6 per cent to alternatives or illiquid assets, a figure he says exceeds 50 per cent when the heavily illiquid property allocation is taken into account. Sherbrook runs client portfolios with as little as 10 to 20 per cent in listed assets and cash, with the majority in alternatives, and can access hedge funds with minimum investments of $1 million-plus by pooling client funds through special purpose vehicles. Lord reports 12.7 per cent per annum returns averaged over seven years with zero defaults for its debt investments, which span property, peer-to-peer lending, livestock lending, disbursement funding and unlisted corporate credit.
Liquidity is the central trade-off. Holder notes that alternatives are often, though not always, less liquid than traditional assets, and a large private equity commitment may carry a seven-year-plus lock-up. Lord counters that some alternatives have defined terms, such as mortgage-backed securities maturing over one to two years, or hedge funds with monthly redemptions, and argues that clients now appreciate how illiquidity reduces portfolio volatility.
Go deeper than the headline
Research every firm in this story, track the ones that matter and get the daily briefing — free for 7 days.