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BoS: Alts crucial to diversification

Alternatives, such as hedge funds and private equity, are an important diversification tool, especially at a time when markets are becoming more volatile, argues James Cheo, senior investment strategist at Bank of Singapore.
BoS: Alts crucial to diversification

“Given that this year is more uncertain and volatile than 2017, you have to get income from multiple sources,” Cheo told FSA. “There is a need for alternatives.”

The bank has been advising its clients to invest in alternatives during the last two years. It recommends a 14% allocation to the asset class in a balanced portfolio, according to Cheo. The category includes hedge funds and private equity but excludes commodities.

When considering hedge funds, Cheo said that investors should look at those that have a lower correlation to traditional risk assets. “Of course long/short equity and market neutral strategies actually make a lot of sense,” he said.

While all categories of hedge funds delivered, on average, positive returns in 2017, long/short equity strategies topped the ranking, according to an Evestment report.

Source: Evestment

However, the fortunes of hedge funds have turned in 2018. In February, the industry posted its first monthly loss of 2.01% ending its 16-month positive streak, the longest since 2003-2004, the report noted.

“After so many months of positive returns, a downturn was perhaps inevitable,” Evestment noted. “February’s results might give some investors pause coming off the strong 2017 performance and the positive January 2018 returns.”

On the private equity front, BoS’s Cheo believes that opportunities lie in those parts of Europe that are seeing economic recovery as well as in the global healthcare sector.

“These are obviously long-term investments as they have lower liquidity, but this is compensated with higher returns,” he noted.

Private equity continues to outperform public markets globally in the long term, according to Bain & Company’s 2018 private equity report.

For example, buyout funds focused on the US, Europe and Asia-Pacific outperformed the regions’ equity markets on the five-, 10- and 20-year periods ending June 2017, according to the report.

Source: Bain & Company

Other wealth managers tend to agree on the importance of alternatives as a diversification tool.

Roger Bacon, head of investments for Asia-Pacific at Citi Private Bank, said in an earlier interview that although hedge funds hadn’t delivered on their promises, they play an important role in a diversified portfolio.

Arnaud Tellier, Singapore-based head of investment services for Asia-Pacific at BNP Paribas Wealth Management, told FSA previously that alternatives serve as a mid-to-long term diversifier with the probability of achieving higher-than-average risk-adjusted returns compared to traditional asset classes.

Growing demand for alts 

While more client education is still needed, Cheo said the demand for alternatives is picking up. Other industry sources also believe that there will be a pick up in demand this year.

Jervis Smith, managing director and head of investor services for Luxembourg at Citibank said earlier this year that high net worth investors are warming up to alternatives, particularly private equity, private debt and bank loans. “For the wealthier individuals, these are extremely interesting asset classes,” he said.

A survey conducted by Pimco reveals a similar sentiment within Asia’s wealth management industry. A third of the 34 private and retail banks and family offices surveyed indicated that they intended to increase their exposure to alternative assets, particularly liquid alternatives, private equity, real estate, long/short equity and long/short credit.

“Investors are increasingly extending their income-generating universe beyond public markets to capture the complexity and illiquidity premia offered by alternative asset classes,” Pimco’s Scott Steele, head of global wealth management for Hong Kong and Singapore, said in the report.

Part of the Mark Allen Group.