Can alternatives help mitigate market volatility?

But we see volatility as an opportunity to assess whether portfolios are well designed, exposed to defensive sectors and fully diversified. Adding alternatives can help with heightened volatility, reducing the temptation to sell in falling markets. Additionally, some hedge fund strategies are well positioned to outperform in these markets. We believe alternatives offer a combination of attractive risk-adjusted returns, historically less downside-sensitive than equities, and low correlations to other asset classes.

Financial markets had a volatile start to the year.

  • The S&P 500 is down 5.8% year-to-date, while the EuroStoxx 50 has fallen 10.9%.
  • The VIX index of U.S. equity implied volatility jumped as high as 37.5 in March before slipping to 22.2 on April 7, still above its long-term average of 20.

But we believe maintaining a diversified portfolio, including exposure to alternatives, can help investors navigate a more volatile environment.

  • Due to their illiquidity, these investments – whether in private equity funds or hedge funds – offer some protection against the tendency to sell in falling markets.
  • Hedge funds have outperformed stocks almost every year markets have fallen over the past two decades.

We therefore suggest considering alternatives for downside protection and yield enhancement.

  • For investors willing to lock in their capital longer, private equity and credit have historically generated higher returns than listed markets. Private markets can also have a low correlation with public markets, providing diversification benefits.
  • We see opportunities in private equity, hedge funds and structured solutions.

Did you know?

  • Hedge funds performed strongly in 2021, with HFR indices ending the year up between 7.5% and 13.1%. Hedge funds managed $4 billion at the end of 4Q21, having received net inflows of more than $15 billion during the year.
  • Private equity provides exposure to earlier stage growth companies than those typically available in public markets.
  • Direct lending and core real-asset strategies can offer enhanced income opportunities above public market yields, typically yielding 400-600 basis points above LIBOR for senior corporate lending of the middle market.

Investment view

We believe that investors looking to diversify sources of risk and return should consider hedge funds (which can help diversify portfolios beyond stocks and bonds), private markets, structured investments and real estate. direct. To learn more about diversifying with alternatives, click here.

Main contributors – Christopher Swann, Karim Cherif, Patricia Lui

Read the original report – Can Alternatives Help Mitigate Market Volatility?, April 8, 2022.

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