Alternative investments as a strategic component of your capital management
Making systematic use of alternative sources of income
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.
The classic mix of equities, fixed income, real estate and commodities is often no longer sufficient to generate reasonable returns in this environment. Alternative investments and their potential returns, therefore, play an increasingly important role in asset management.
Diversification has many dimensions
Persistently low interest rates are forcing many professional investors to invest in much more complex investment vehicles and to diversify considerably accordingly. Full diversification potential can best be exploited by broadening the investment horizon because in addition to classic risk premiums like equity or interest rate risk, there are other alternative risk premiums.
Investments with an attractive risk/reward profile are becoming increasingly difficult to find. Alternative risk premiums are an interesting admixture because they are independent of each other and also show a low correlation to other asset classes and bonds. A classic mixed portfolio can therefore benefit greatly from the adding alternative beta.
In order to generate stable returns, Metzler uses an absolute return approach to diversify broadly in a variety of risk premiums. This enables us to generate a market-neutral, reproducible returns.
Our absolute return strategies, combine different uncorrelated alternative risk premiums that can be utilized by institutional clients without restriction.
One good way to protect your portfolio, even in times of crisis, is to invest in market inefficiencies. They provide a counterpole to risk premiums.
The most prominent example of a market inefficiency is probably the momentum anomaly that can be exploited using 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 at an attractive price, especially in the case of market inefficiencies.
Traditional investment accounts are hit particularly hard when interest rates rise and equity markets experience a correction. Diversifying with a mix of alternative investments inevitably reduces the weighting of critical allocations, making the portfolio less prone to price corrections.