One method is diversification but we are not just talking about the traditional balanced approach of equities, bonds and cash. Today’s story is about alternatives – property, hedge funds, soft and hard commodities, structured products and private equity. Diversification is all about multi-asset class investing.
The key is correlation. Many of these asset classes not only have low correlation to equities and bonds but they often have a low correlation to each other. This allows investors to create a fund that is not only diversified but also likely to generate relatively stable returns regardless of market conditions.
In the past, many alternative investments have been the domain of high-net-worth investors. However, with a range of managers now offering multi-asset funds, often through their multi-manager products, it has never been easier for private investors to get access to this increasingly important area.
Why the multi-manager approach? The risk-reducing benefits of many alternative investments are becoming increasingly recognised and they are finding their way into more and more portfolios. However, with the alternatives arena growing at a rapid rate and the products becoming increasingly sophisticated, a greater understanding of this area of the market is required. Multi-managers have this understanding and the resources to carry out the necessary due diligence. They often have a greater access to products, many of which are not offered to private investors. Bigger players, such as Credit Suisse, are not limited to existing products as their size and scale allows them to have bespoke vehicles made up for them.
What I have emphasised in this article so far is the need to diversify across the growing range of asset classes but there is one other aspect to diversification that investors may not be so familiar with – the need to diversify across managers. Different managers have different skills and specialise in different areas. No one manager will outperform year in, year out. Performance depends on market cycles and economic conditions. It is easy to see why multi-manager funds make a compelling investment proposition.
Graham Duce is co-head of the UK multi-manager team at Credit Suisse