Alternative investments as a strategic component of your capital management
In periods of historically low interest rates, investors seeking returns have to take greater and greater risks. Generating positive returns thus becomes a real challenge, especially for institutional investors, who in many cases are subject to extensive regulatory allocation restrictions and have only a small risk budget at their disposal. Understanding an alternative strategy in detail requires a lot of expertise. However, assessing the risks correctly can produce pronounced diversification effects in appropriate investments in this asset class and deliver additional returns at today’s interest rates. The classic mix of equities, bonds, real estate and commodities often is no longer sufficient to generate a reasonable return in this environment. Alternative investments and their potential returns, therefore, increasingly play an important role in asset management.
To generate reasonably stable returns, Metzler allocates a wide variety of risk premiums in its absolute-return approaches. This enables us to generate a market-neutral, reproducible return.
In our absolute-return strategies, we combine different uncorrelated alternative risk premiums that can also be utilized by institutional clients without restriction.
One attractive way to protect your portfolio well, even in times of crisis, is to invest in market inefficiencies. They are in every way the opposite of risk premiums.
The most prominent example of market inefficiency is probably the momentum anomaly, which can be exploited through trend-following strategies. The basic premise here is that new information can only be reflected in market prices with a delay, and can then lead to exaggerations as well – in both rising and falling markets.
Market inefficiencies thus rely on imperfect markets and irrational investor behavior, which is especially strong in times of crisis.
Alternative investments offer diversification potential at attractive prices, especially in the case of market inefficiencies.
Traditional investment accounts are hit especially hard when interest rates rise and equity markets correct. Diversifying with a good mix of alternative investments inevitably reduces the weighting of critical allocations, making the portfolio less prone to price corrections.