DIY Investor Magazine
|
Oct 2017
25
Some alternatives are closely correlated to ‘risk’ assets
and should be treated as pseudo-equities. You should
only invest in them when the valuation is attractive and
the right time in the cycle. A common mistake is to
assume that because something is not an equity it will
not behave like one during a bout of risk aversion.
Private equity would normally be expected to be fairly
highly correlated to public equity markets. This is for
two main reasons: valuations are derived to a large
extent from public listed equivalents and underlying
company performance is clearly highly influenced by
general economic momentum, as with listed equities.
While we have taken some profits in this area due to
rising valuations – accounting ratios that indicate the
relative value of a company to its history or peers – we
retain holdings in funds that are doing more selling than
buying, (in other words mature funds that are harvesting
gains on investments made several years ago and
selling into a market that is prepared to pay high relative
prices).
Hedge funds on the other hand can vary between
being highly correlated to stock markets and not at all.
These strategies are both vilified and lauded. Some of
the approbation is merited. To my mind a hedge fund
should not be a more risky investment than the equity
market, whereas this is not always the case.
Meanwhile, limited regulatory oversight in some
cases has also led to poor risk management and the
occasional dodgy practice. These are the exceptions
not the rule in what is now a USD3 trillion sector. The
clue should be in the name; a hedge fund strategy
should primarily be defined by its greater flexibility,
particularly a focus on absolute not relative returns,
and its ability to short securities (i.e. profit from falls in
their prices). This flexibility and greater opportunity set
(having both longs and shorts) enables hedge fund
managers to generate more consistent returns than long
only managers, especially in sell-offs, thereby providing
a much-needed form of diversification in these lofty
markets.The key clearly, as with investing in general,
is to understand what you are investing in and have a
good idea of how valuations might change in differing
market backdrops. (And if you don’t have the time or
resources to do this, outsource to an expert in this area.)
Mainstream equities and bonds have been around for
centuries and hence are tried and tested throughout
booms and busts, war and peace. The same cannot be
said for all alternative asset classes or strategies, and
their potential liquidity, complexity and unconstrained
nature make analysis and assessment more onerous.
However, the dual role of alternatives as both a
diversifier and an attractive source of potential returns
make them a vital part of every investor’s portfolio,
particularly at this juncture.
James de Bunsen is Fund Manager of Henderson
Alternative Strategies Trust with Ian Barrass, at
Janus Henderson Investors.
The information should not be construed as investment advice. Before
entering into an investment agreement please consult a professional
investment adviser.
Past performance is not a guide to future performance. The value of an
investment and the income from it can fall as well as rise and you may not
get back the amount originally invested.
Issued in the UK by Janus Henderson Investors. Janus Henderson Investors is the name
under which Henderson Global Investors Limited (reg. no. 906355), Henderson Fund
Management Limited (reg. no. 2607112), Henderson Investment Funds Limited (reg. no.
2678531), Henderson Investment Management Limited (reg. no. 1795354), AlphaGen
Capital Limited (reg. no. 962757), Henderson Equity Partners Limited (reg. no.2606646),
Gartmore Investment Limited (reg. no. 1508030), (each incorporated and registered
in England and Wales with registered office at 201 Bishopsgate, London EC2M 3AE)
are authorised and regulated by the Financial Conduct Authority to provide investment
products and services.
