Alternative investments: The finishing touch on your investment strategy.

Alternative investments can effectively combat the risks of volatile equity markets. Why? Because global real estate investments and hedge funds with merger arbitrage strategies in particular are known to generate returns, regardless of the stock markets. This makes them the perfect complement to your portfolio.

Alternative investments are more than a tidbit

What does umami have in common with alternative investments? As a taste in isolation, umami can be unsensational. When combined with other things, it gets the appreciation it deserves. The same principle applies to alternative investments. Their benefits are not always valued or understood when standing alone.

Alternative investments, such as real estate, private equity, and hedge funds, however, are a key ingredient in multi-asset class portfolios with increased risk-adjusted returns. In today's low interest environment, they have the potential for positive, stable returns, which makes them a source of stability in portfolios.

A positive outlook for real estate investments

Real estate is traditionally a popular investment. But investors should look outside of their home market to diversify globally, because international real estate investments offer the opportunity to participate in growing markets with different economic structures. Furthermore they are barely correlated with the global stock market and even less so with the Swiss real estate market. This is an effective way to improve a portfolio's risk/return profile.

The expected environment of moderate economic expansion and accommodative monetary policy is in general supportive for both listed and direct real estate worldwide.
It is highly likely that this sector will be driven worldwide by disruptive factors such as new technologies, a narrower focus on sustainability, and the trend toward urbanization.  Real estate therefore continues to offer a yield premium versus bonds and equities.

Real estate investments mean solid returns

Real estate investments mean solid returns

Comparison of returns from bonds, stock dividends, and real estate (in %)

Last data point: 25.10.2019

Source: Datastream, Bloomberg, Credit Suisse

Generate excess returns with hedge funds

Hedge funds that follow a merger arbitrage strategy can also be used to complement a portfolio. These funds seek to exploit pricing inefficiencies that may occur before or after a corporate event such as a merger, acquisition, or spinoff. An arbitrageur must always consider several risks, including regulatory constraints, a collapse of the financing deal, a deterioration in company performance, or the shareholders voting against the deal.

Ultimately, merger arbitrage strategy funds offer additional sources of excess return. One unique advantage of merger arbitrage is that these kinds of investments are not dependent on the stock market. Success or failure of the arbitrage strategy is more closely related to developments in the target and acquirer companies. Furthermore, the continued robust growth in M&A activities, especially in the US, should offer a constant supply of investment opportunities.

Constant M&A activity offers hedge funds many opportunities

Constant M&A activity offers hedge funds many opportunities

Source: Eikon, Macrobond, Lyxor AM, 7.12.2018

Hedge funds and real estate stabilize portfolios

Real estate and merger arbitrage both have their own way of generating returns, while staying independent from the stock market. This enables them to act as performance stabilizers in a multi-asset portfolio. Moreover, market corrections are constructive for the strategy, as volatility creates wider spread opportunities. This in turn acts as a further stabilizing feature when adding the strategy to an equity portfolio.

It is true that we do not always crave the strong umami flavors. However, is the fact that it offers sophistication that cannot be found elsewhere. This also applies to alternative investment instruments that – when sought out, understood, and properly implemented – lift portfolios to another sophistication level.

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