Alternative investment strategies after Evergrande and Tapering
- Chinese mortgage risk and Fed tapering both hit equity markets last week.
- UBS said investors should consider diversifying into alternative assets before the fourth quarter.
- Insider details the bank’s three main alternative sources of return.
Stock markets were rocked last week when China’s second-largest real estate developer, Evergrande, struggled to cover its $ 300 billion commitments and the
announced that it would start reducing asset purchases “soon”.
According to Mark Haefele, chief investment officer of Swiss investment bank UBS, the world’s largest asset manager, the two events point to looming stock market risks.
“Markets were volatile last week as investors grappled with concerns about credit risk in the Chinese real estate market and the Fed’s downsizing,” Haefele said in a recent research note. “With various risks on the horizon, investors may consider diversifying their sources of risk and return in the last quarter of the year.”
UBS said that while both events injected some volatility into global markets, there was still upside potential for equities.
“While changing events may trigger further episodes of volatility, we do not see a general systemic risk that would cause investors to underweight China or equities more broadly,” Haefele said. “We advise caution only in affected sectors such as Chinese real estate and financial services.”
However, with the stock markets still close to their all-time highs, the bank said now is the time for investors to diversify their portfolios.
“The alternatives may offer a way to potentially improve portfolio returns and increase diversification,” Haefele said. “We believe investors should consider a range of alternative sources of return as the fourth quarter approaches.”
Insider presents UBS’s three favorite alternative investment strategies.
Put options and structured products
A put option gives its owner the right to sell a specified amount of a stock when it reaches a certain price. These tend to increase in value as the volatility of an asset increases.
UBS said options strategies currently represent an attractive alternative to bonds as a hedge against stock market declines.
“The demand for put options, which help protect against stock market declines, has increased,” analysts said. “Investors looking to hedge their exposure to equities should consider selling spreads, or similar structures, which combine long and short positions to reduce protection.”
The bank also recommended retail investors to turn to structured products. These provide access to derivatives, which are financial contracts between several parties.
“Investors who wish to participate in a further rise but fear short-term downturns might consider using structured investments with upside and downside protection characteristics,” UBS said. “The high asymmetry allows them to benefit from the asymmetry of earnings.”
A hedge fund is an actively managed investment vehicle available to high net worth investors.
“Historically, hedge funds have both suffered lower drawdowns and recovered faster than stocks during crises,” Haefele said. “Data since 1990 suggests that adding exposure to hedge funds has improved the risk-return profile of a multi-asset portfolio.”
After the sector posted double-digit returns in 2020, the average hedge fund has returned between 5% and 10% so far this year, compared to 16% return for the S&P 500, according to the HFR indices. The total collection for 2021 is $ 18 billion.
UBS said hedge funds would be particularly helpful in diversifying an investor’s portfolio if the Evergrande debt crisis and a change in Federal Reserve monetary policy continued to cause increased market volatility.
“Although hedge funds have outperformed a rising stock market only three times in the past two decades, almost every year that stocks have fallen, hedge funds have outperformed stocks,” the bank said.
Private markets, made up of private equity and private real estate, are defined as capital that is not listed on a stock exchange. These types of investments have historically outperformed stocks but are not always readily available to all investors.
“Over the next few market cycles, we expect private equity and private real estate to return 9.5% and 7.6%, respectively, compared to just 6.6% per year for large US stocks. capitalization, ”Haefele said.
UBS said investing in private markets creates alternative sources of growth. Private equity funds invest in small and medium-sized companies, offering greater exposure to emerging markets.
“497,000 tech companies around the world are privately held, compared to just 8,100 listed on the stock exchange,” analysts said. “Private equity investors are particularly active in fintech, digital subscriptions, healthcare and in sectors benefiting from the transition to more sustainable economies. “
“Private markets can offer a potential way to improve portfolio returns and increase diversification,” they added.