In most investment portfolios, increased wealth means increased complexity, as well as the investors' desire to build and maintain their existing capital. As volatility continues in global markets, many high-net-worth investors are looking to reduce their exposure to traditional stocks and bonds in an effort to generate absolute returns.
Some sophisticated investors are turning to alternative investments — such as private equity, real estate, infrastructure and hedge funds — as a way to diversify and stabilize their portfolios. Alternative assets may provide higher yields than bonds and more stability than stocks.
“Alternative assets give investors the ability to add value in a portfolio in a way they don't have in the public markets with traditional stocks and bonds,” says Michael Kitt, head of real estate equity investments at RBC Global Asset Management.
According to research by The Economist Intelligence Unit (EIU), commissioned by RBC Wealth Management, 34 percent of high-net-worth (HNW) investors in Canada say they prefer to invest in real estate and 64 percent specifically invest in alternatives, such as hedge funds.
The New wealth rising survey targets high-net-worth individuals (HNWIs), adult children of HNWIs, and high-earning professionals across Canada, the U.S., UK, China, Hong Kong, Singapore and Taiwan. It looks at the shifting landscape of global wealth, where wealth will be, what it will be invested in, how it will be invested and who is investing.
Alternatives can provide diversified asset classes with a low correlation to stocks and bonds. “The result is they reduce the volatility of your overall portfolio which, in turn, can lead to better risk-adjusted returns,” says Kitt, who has extensive experience in the global real estate sector.
“Alternatives can positively contribute to your portfolio in many different ways,” Kitt says.
Some alternative assets also provide steady cash flow and are linked to inflation, which Kitt says provides some protection to the real value of portfolios. These are all critical factors for investors seeking to build more stable returns over the long term.
Alternatives no longer just for institutional investors
Alternative assets have traditionally been the domain of large institutional investors, such as pension funds, due to their complex financial structures. Changing technology and regulations have opened up the space to other types of investors including smaller institutions, accredited investors and HNWIs, and ultra-high-net-worth (UHNW) families.
These investors often have investable assets equal to some institutional clients, and Hermann Leiningen, managing director, international family office investments in the Enterprise Strategic Client Group at Royal Bank of Canada, says this allows them to diversify into other asset classes.
He says alternative assets become more interesting late in a market cycle as investors anticipate a rise in volatility across parts of their portfolio. “The higher stocks go, the more investors look to diversify in anticipation of when volatility comes back.” Investors should hedge away – and prepare for — some additional risk in a stock portfolio, adds Leiningen.
He notes that more investors began inquiring about alternative assets, such as real estate, private equity and hedge funds, in the years following the 2008-09 global recession.
For clients around the world who want to move beyond stocks, bonds and cash, alternative investments can be “a great addition to their portfolio,” Leiningen adds.
According to the New wealth rising survey, most respondents expect their investment strategy to change in the next five years, with limiting risk and diversification as key drivers.