Evercore Pan Asset

In the heady days before the Credit Crunch so called alternative investments became increasingly popular. Portfolios had to have exposure to commodities, or private equity, hedge funds, infrastructure, or managed futures. The sales patter told Trustees and investment consultants that these assets were “uncorrelated” or more correctly less correlated with equity markets. You might, they hinted, earn superior returns to holding shares or bonds, with less or different volatility from conventional assets. The financial world had become so clever that it could craft new types of fund and instrument with almost magical powers. They would be better than traditional holdings.

In the Credit Crunch there was a rude awakening. Many of these alternative assets fell as much as or more than conventional shares. Many alternatives turned out to be correlated with easy money and plentiful credit, just as shares were similarly related to the credit cycle. Many hedge funds disappointed, losing substantial sums. Most commodity prices fell sharply as the money was turned off. Private equity was difficult to sustain, dependent as it had become on large amounts of borrowing to lever any deal. Infrastructure deals were more difficult to construct, as utilities and governments found it more difficult to afford them. Any clever arrangement of options, futures, bonds and borrowings was subject to worry as prices of many financial instruments moved well outside past trading ranges and as some banks fell into financial trouble.

So was the theory of alternatives just a bull market phenomenon? Was it a bad idea? 

Nothing proposed by intelligent members of the financial community is ever a magical answer to the eternal quest for reward without undue risk, nor is anything usually completely wrong. Most investments have their good and bad points, and their seasons in fashion. Many of the alternative asset classes have good features which a portfolio investor should consider.

In a world of rapid emerging market growth with many more people coming to enjoy higher living standards, commodities can prove a good longer term proposition. Even in the hard times precious metals did well. In the better times of global expansion many commodities are in demand. Similarly, as the world returns to growth private equity can start to find good deals again which can earn superior returns, even allowing for lower levels of borrowing than were common before 2008. As world demand expands, so there will be a further surge in infrastructure spending and investment.

The lessons to be learned from the poor experience with many alternatives  in the 2007-9 period is that there is a price for everything – you can pay too much – and you need to be careful about illiquid investments. Investors discovered that they could not get out of some of their alternative investments in a timely way at a price they considered decent.

That’s where our approach can help. We do offer overall strategic advice on the main alternative asset classes. It is possible to invest in them through passive and liquid Exchange Traded funds. In the case of different types of commodities you can invest in the commodities themselves in an ungeared way without having to take delivery of the physical stocks. In the cases of private equity and infrastructure you can track indices of shares which are reasonable proxies for the underlying assets, but which keep you liquid and able to exit at a minute’s notice if you wish. We would be happy to talk to larger funds about managing segregated alternative asset portfolios, as well as to general investors about the proportion of a fund that could be exposed to these types of asset.