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. In Investment Outlook, Credit Suisse financial experts show how alternative investments are likely to perform in 2020 and why they represent an exciting investment opportunity.

Alternative investments offer diversification opportunities

Alternative investments have become increasingly established as a building block of portfolios, particularly in today’s world of low-for-longer interest rates and yields. They are appreciated not only for their diversification benefits, but also for providing stability to portfolios. How four types of alternative investments are likely to perform in 2020, and what investors need to bear in mind.

1. Hedge funds are currently a sensible alternative investment

In a world of extremely low bond yields and cyclical uncertainty ahead, holding a diversified portfolio of hedge funds (HF) continues to make a lot of sense. Though performance is likely to be in the mid single digits and therefore fairly modest, it should still be above investment grade bonds.

That said, the industry’s returns as a whole also remain somewhat exposed to traditional assets. However, seasoned hedge fund managers with a proven ability to add value are likely to perform well in any phase of the economic cycle. This may be in the form of diversified macro and opportunistic long/short equity strategies as well as uncorrelated strategies that invest in alternative risk premia. Beyond specific strategies, it remains key to rely on experts who perform extensive and highly informed due diligence.

2. Investments in real estate remain attractive in 2020

The real estate sector faces a number of structural changes. The trend to online shopping is likely to continue exerting pressure on traditional stores. In contrast, industrial assets should benefit from this shift. Another much-discussed structural change is the growth of flexible office space, which in many places accounts for 10% or more.

The projected environment of moderate economic expansion and accommodative monetary policy is in general supportive for both listed and direct real estate worldwide. Direct real estate where lower interest rates do not yet appear fully reflected in the price are especially attractive. In addition, yields tend to be fairly stable. In contrast, global real estate equities already reflect lower rates with historically high valuations. Moreover, earnings upside is limited.  Investments in the euro zone are likely to be particularly worthwhile, as the yield spread versus government bonds is above the long-term average.

Real estate remains an attractive alternative investment

Real estate remains an attractive alternative investment 

Yields on bonds, global equities and real estate equities (in %)

Last data point: 25/10/19

Source: Datastream, Bloomberg, Credit Suisse

3. Private equity is a growth market among alternative investments 

Private equity (PE) has become more and more popular among investors in recent years, partly because of reductions in the minimum investment required. Private markets are almost twice as large as a decade ago, and the rise of secondary funds offers depth and differentiated exposure. For investors, a larger universe brings with it better diversification potential. In 2020 private equity should deliver a total return of approximately 8 per cent, somewhat below the historical average.

That said, PE still offers a fair illiquidity premium over public equities. PE can also generate excess returns over liquid markets in an increasingly challenging environment. Due diligence, fund and manager selection are paramount given the illiquid nature of private markets.

4. Investments in precious metals safeguard against recession risk

Commodities have been on diverging paths this past year, with cyclical segments trailing precious metals amid slowing industrial production. Going forward, this divergence should diminish. An easing of the trade war and brightening of sentiment could trigger a rebound in industrial metals.

Modest demand growth coupled with robust supply points to oversupplied oil markets in 2020. This is likely to result in a temporary decline in oil prices Gold prices and other precious metals however are likely to remain supported as long as (real) yields remain low or even negative and economic uncertainty persists. In case of a full-fledged recession, precious metals would make further gains.

investments in gold benefit from low real yields

Investments in gold benefit from low real yields 

Real Treasury yields (in %) and gold price (in USD/ounce)

Last data point: 25/10/19

Source: Bloomberg, Credit Suisse

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