As institutional investors increasingly look for sources of alpha outside of traditional asset classes, the benefits of alternative investments are coming to the fore, according to BlackRock.
Interest rates are currently low but investors are concerned about the potential for them to rise in the medium term. Many pension schemes are significantly underfunded and need to compound returns at or above funding levels in order to regain lost ground. As a result, institutional investors are looking for yield and diversification to protect themselves against rising rates and inflation. Liquidity and transparency are important factors in deciding which strategies to invest in.
Matthew Botein (pictured), Head of BlackRock Alternative Investors (BAI), outlined some of the key headwinds facing European institutional investors and explained how allocating to alternatives could provide much-needed solutions. “In the current market environment traditional growth portfolios are struggling to offer investors attractive returns while protecting against the threat of inflation. We believe alternative investment strategies can provide a solution by increasing portfolio efficiency, providing attractive and less correlated rates of return and offering some protection against rising rates.”
An alternative asset class that institutional investors are increasing their allocations to is UK real estate. Commenting on the sector, Marcus Sperber, Head of BlackRock’s International Real Estate business, warns: “Investors need to adopt appropriate strategies when investing in real estate. Following the 45% fall in UK Real Estate values between 2007 and 2009, investors have retreated to "safe" high quality assets. We believe prices in this segment of the market are now inflated with a potential bubble emerging. We are finding superior investment opportunities in assets with potential to add value, non-traditional sectors and real estate mezzanine debt.”
Another alternative strategy that is proving popular amongst institutional investors is global macro. Ken Kroner, Head of the Global Market Strategies Group at BlackRock, explained why the strategy is particularly appealing to institutions: “Global macro strategies exploit global imbalances across asset classes and regions which makes them incredibly diversified. Even throughout the credit crisis the sector produced positive returns compared to -40% from the MSCI World1. Another key characteristic of the strategy is it offers high levels of liquidity with lower capital commitment.”
