Since the beginning of 2024, there has been a 32% increase in searches for ‘alternative investments’ according to Arbuthnot Latham Private Banking.
Alternative investments have become an increasingly popular diversification tool for portfolios: the bank says that whilst traditional investments offer stability, alternative investments offer the potential for higher returns.
Arbuthnot Latham head of investment research Peter Doherty says: “Over the last decade we have generally been in an environment where government bonds have helped to protect multi-asset portfolios through periods of stock market volatility.
“However, since the onset of the high inflation environment post-2021 we have seen a shift in this relationship, where western central banks responded by sharply increasing interest rates in an attempt to cool the inflation backdrop and both stocks and bonds suffered in unison. This meant traditional multi-asset portfolios which rely on stock and bond allocations would have suffered materially.”
He says examples of these alternatives include private equity (that is, investing in private companies); commodities (that is, tangible assets such as energy, metals and agricultural goods); and collectables (such as art, wine and jewellery).
Doherty states: “In this environment it has been vital to look outside of traditional asset classes to find assets that can offer those important sources of diversification and protect portfolios in the new environment we are in.
“Alternative asset classes such as commodities, which are a key input into inflation and hedge funds that can take advantage of these market dislocations have been essential in offsetting the risks present in traditional portfolios to protect capital in the new higher inflation environment we find ourselves in.
“In particular, to hedge the risks of higher inflation, oil has played a pivotal role in our portfolio design in the last three years, as we have found oil is highly influential on inflation expectations, which in turn impact the outlook for interest rates. This means that if oil rises substantially, we benefit from this, while government bonds would suffer.
“In the hedge fund space, we have an allocation HF managers who have been able to generate strong returns by taking advantage of inefficiencies in markets.”
Arbuthnot Latham sets out what it suggests are the pros and cons.
The Pros are potential for high returns where private equity, commodities, and real estate offer the potential for higher returns than traditional investments; and
Diversification, where alternative investments can help reduce portfolio risk.
The Cons include higher risk profiles which may not be suitable for all investors; a lack of risk management because certain alternative investments may not be authorised or licensed; and a lack of transparency as assets are often assessed based on information provided by investment providers rather than traded on a public market like bonds or shares.
Arbuthnot Latham concludes that although alternative investments carry greater risk, they are often viewed as a successful diversification strategy.
However, due to the nuanced and complex nature of the alternative investment market, it is crucial to assess all potential risks, not just the potential reward.
