Overall, Deutsche Wealth recommends a 10% allocation to alternatives in a balanced portfolio, which include hedge funds and illiquid investments, such as private equity and real estate.
The firm first started to recommend a 10% allocation in alternatives 12 months ago from the previous 5% allocation, according to a Hong Kong-based spokeswoman for the firm.
However, officials still caution investors about the risks associated to the asset class.
“While alternatives can have a very effective role in diversifying a portfolio, they need to be selected in a way that does not create an unintended concentration risk,” said Christian Nolting, global chief investment officer and global head of discretionary portfolio management, in the firm’s CIO insights report for the third quarter.
Nolting previously highlighted the importance of being selective in hedge fund strategies:
“What we need in the portfolios is something which is uncorrelated to both fixed income and equities. That might be some hedge funds,” he said at a June media briefing in Hong Kong.
He does not believe in putting a “a lot of money into all hedge fund strategies. I think that is something we are really convinced of”, he said at the briefing, but did not provide figures.
Other private banks and wealth managers have also recommended alternatives in clients’ portfolios. UBS Wealth Management is recommending clients to allocate up to 20% of their assets to hedge funds. Bank of Singapore is recommending a 14% allocation to the asset class, while BNP Wealth Management is recommending around 5%-10%.
Hedge fund recommendations
For the third quarter, Deutsche Wealth’s recommended allocation toward equity long/short was reduced to 17.5% from 22.5% in the previous quarter, according to the bank’s latest CIO report (PDF).
The data below is within the 10% recommended allocation to the alternatives asset class.
Deutsche did not specify the recommended percent of exposure to hedge funds within the overall asset class.
Changes recommended to hedge fund allocations
|
Q3 2018 |
Q2 2018 |
|
| Discretionary macro |
20.0% |
17.5% |
| CTA |
15.0% |
17.5% |
| Event driven |
20.0% |
20.0% |
| Equity market neutral |
20.0% |
15.0% |
| Credit long/short |
7.5% |
7.5% |
| Equity long/short |
17.5% |
22.5% |
Source: Deutsche Wealth’s CIO Q3 and Q2 reports
“Equity long/short strategies may be affected by a generally negative shift in sentiment in equity markets, after years of uncommonly calm conditions and this has led to a downgrade in the firm’s assessment to neutral,” the bank said in a statement.
On the flipside, the firm is positive on discretionary macro hedge fund strategies, which attempt to gain from macroeconomic, policy or political changes.
“These strategies’ potential ability to capitalise on policy divergence in the major developed economies and uncertainty has informed the firm’s positive rating for this strategy,” the bank said.
The bank also likes equity market neutral strategies, which should benefit from an increased dispersion of performance across sectors.
Turning to the illiquid assets within alternatives, the bank sees opportunities in private equity, which has continued to deliver attractive returns. However, the increasing investment in private equity funds has driven valuations higher over recent years, the report noted.
Deutsche Wealth is also positive on real estate investment. “In Asia-Pacific, we are positive on the industrial sector and see healthy office rental growth momentum in several markets,” Nolting said in the statement.
Hedge fund returns
