Alternative investments: Achieve a more stable portfolio

Achieve greater portfolio stability. With alternative investments. 

Alternative investments are a good way to round off a portfolio and spread your risks. How alternative forms of investment differ from other options and why they are an exciting way to invest.

Alternative investments offer diversification opportunities

Alternative investments have become a common feature of investment portfolios. Not only do these investments provide greater diversification, they also bring stability to the portfolio. Four exciting alternative investment options that investors should keep in mind.

1. Hedge funds are a sensible alternative investment

When bond yields are extremely low and equity markets are volatile, alternative investments in the form of hedge funds can open up additional sources of return. Alongside diversified macro equity strategies and opportunistic long/short equity strategies, merger arbitrage strategies, for example, also provide additional sources of excess return. The long/short equity strategy supports long-term investment in promising positions and with a positive return even in the event of falling prices. Merger arbitrage strategies, in turn, aim to exploit price inefficiencies that can occur in connection with corporate scenarios such as mergers. One benefit of this type of investment is that it is not directly dependent on the equity market. Instead, success or failure is driven by developments within the object of the takeover and within the acquiring company. The completion of detailed due diligence checks by someone with the relevant expertise is a key element of any investment in a hedge fund.

2. Investments in real estate remain attractive

Real estate offers another alternative to traditional investment products. The real estate sector is facing a number of structural changes. The current preference for online shopping, for example, is likely to continue exerting pressure on traditional brick-and-mortar stores. Conversely, there is potential for industrial real estate to benefit from these changes. What's more, the persistently low interest rates have lent long-term support to the performance of Swiss real estate funds in the residential segment in particular.

It is important that investors not only consider what the domestic market has to offer but also strive for global diversification. International real estate investments provide an opportunity to invest in growth markets with different economic structures. In addition, there is little correlation with the global equity markets and less still with the Swiss real estate market. This is an effective way to improve a portfolio's risk/return ratio.

Real estate is an attractive alternative investment

Real estate is an attractive alternative investment

Yield on bonds, global equities, and real estate equities (%)
Last data point: July 2020
Sources: Datastream, Bloomberg, Credit Suisse

3. Private equity is a growth market among alternative investments

Private equity has become increasingly popular with investors in recent years; one reason for this popularity has been the declining minimum investment amounts. Private markets are now almost twice as big as they were ten years ago, and the emergence of a secondary market enables differentiated exposure. This gives investors the benefit of greater diversification potential.

Furthermore, this form of investment offers an appropriate illiquidity premium vis-à-vis public equity. In addition, private equity is subject to different yield drivers than conventional asset classes and offers good prospects for excess return even in challenging times. However, here too, careful due diligence checks and appropriate fund and manager selection are crucial to the success of the investment in view of the illiquidity of the private markets.

4. Investments in precious metals safeguard against recession risk

Commodities such as oil or metals can also generate added value for the portfolio as alternative investments. The factors affecting their prices are in some cases different than those affecting traditional asset classes. As a result, commodities are characterized in the long term by low correlation with equities and bonds.

As long as (real) returns remain low or even fall into the negative range and economic uncertainty persists, the price of gold and other precious metals is likely to remain well supported. The recovery from the coronavirus crisis is also a positive sign for the oil price.

Investments in gold benefit from low real yields

Investments in gold benefit from low real yields

Real yield on US Treasuries (%) and gold price (USD/ounce)
Last data point: July 7, 2020
Sources: Bloomberg, Credit Suisse

Alternative investments – always a step ahead

Whether it's hedge funds, real estate, private equity, or precious metals, the possibilities for diversification are (almost) endless with alternative investments. They provide the necessary tools to stay a step ahead at all times in the world of investment. Having the broadest possible range of investments enhances the individual portfolio and provides scope to implement the best possible solution in the event of fluctuations in the economy.

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