Marc Van de Walle
Head, Group Wealth Management, OCBC Bank
Chairman of OCBC Wealth Panel
OCBC offers insights to investors keen on growing and diversifying their portfolios
IN TODAY'S volatile market, many investors are seeking new ways to complement traditional investment strategies to generate higher returns. Liquid alternatives offer opportunities for investors to take advantage of higher volatility while, at the same time, enhance returns over the medium-term through diversification and risk-mitigation.
According to Mr Marc Van de Walle, head of Group Wealth Management, OCBC Bank, and chairman of the OCBC Wealth Panel, "There are a number of factors driving the demand for liquid alternatives. From a macro perspective, this is really an extension of the growing demand for the alternatives asset class in general, which would include hedge funds and private equity funds. Alternative investments have grown in popularity due to the high market turbulence that many investors endured with traditional stock and bond portfolios over the past decade."
"Additionally, the slow global growth environment has resulted in more muted forward-looking return expectations for most asset classes. These factors have driven investors to look beyond traditional asset classes with classic buy-and-hold strategies. Alternative investments offer investors the ability to diversify and improve the returns of their portfolio with lower correlation and reduced volatility."
In the past, traditional alternative investments such as hedge funds and private equity were primarily limited to institutional investors or high net worth individual investors. This is due to the unregulated nature of the alternatives investment class. Additionally, a stake in alternative investment required a number of additional investment hurdles including, but not limited to, net worth requirements, limited liquidity, high minimum investments and other restrictions.
"The introduction of liquid alternatives has opened up the world of alternative investing to an even wider investor base," says Mr Van de Walle.
The benefits
Liquid alternatives are organised like mutual funds, providing investors with access to sophisticated hedge-fund-like strategies while allowing the flexibility of daily or weekly liquidity. These investments have the potential to reduce overall portfolio risk and mitigate the effects of severe drawdowns, especially during periods of market stress.
In contrast to traditional alternative investments, liquid alternatives are much easier to redeem, have greater transparency and lower investment minimums. Liquid alternative funds provide investors the ability to redeem their investment anytime rather than having their money locked in. In addition, liquid alternatives can offer a variety of fee structures depending on the preference and priority of the particular investor.
"One of the key differences is that liquid alternatives have fewer investment constraints versus traditional mutual funds. Liquid alternatives are designed to capture alpha opportunities and generate absolute returns on a risk adjusted basis," says Mr Van de Walle.
Over a longer investment horizon, studies have shown that alternative investment classes, such as hedge funds, exhibit more stable returns with lower volatility on a risk-adjusted basis than most major asset classes. Incorporating liquid alternative strategies in portfolios can provide a more stable return profile as a result of greater diversification, which may increase the effectiveness of investors' asset allocation strategy.
Liquid alternatives tend to have more flexible investment mandates and are generally benchmark agnostic. This allows fund managers to invest across a broader range of markets and asset classes using a wider array of financial instruments relative to long-only or benchmark-oriented managers. With a less constrained investment mandate relative to traditional mutual funds, liquid alternative fund managers are able to take advantage of an expanded investment opportunity set to capture alpha, hence potentially improving the overall returns of an investor's portfolio.
Mr Van de Walle says: "Liquid alternatives pursue less constrained investment styles and are typically positioned as absolute return products. Their mandate is to generate alpha regardless of market direction and hence offer the ability to produce uncorrelated returns to potential investors. Along these lines, liquid alternatives certainly have a role to play in providing investors more choice along the liquidity spectrum and can offer additional features such as limitations on concentration risk, leverage and other requirements that unregulated investment products may not necessarily follow."
For instance, says Mr Van de Walle, a fund like JPMorgan Global Macro Opportunities, a liquid alternative fund, not only has the flexibility to invest in traditional assets like equities and fixed income, but also wields a toolkit of derivatives - non-traditional assets such as options and futures - which enable the fund to take long or short positions in currencies and other assets to generate returns in accordance to different market conditions. This increases the flexibility and expands the opportunity set for a fund manager to find attractive market opportunities versus a traditionally simple buy and hold strategy.
Things to consider
Mr Van de Walle highlights the importance of a fund manager in liquid alternatives investment. He explains: "Investing in the alternatives space is more challenging versus traditional asset classes because access to managers and information can be restricted. Plus, the dispersion of returns among managers can vary widely. Therefore, manager selection is critical and should be based on a well-designed due diligence process."
"Liquid alternatives should be evaluated on their track record - their ability to produce strong risk-adjusted returns over time, while mitigating both portfolio volatility and drawdowns through a range of market stress and downturns. Once a credible manager is selected, there is a need for constant monitoring and re-evaluation of managers to ensure that the original investment objectives remain intact and that the managers are positioned to perform in the environment at each point."
Looking ahead, by combining the proven advantages of hedge fund strategies with the benefits of daily liquidity and transparency, liquid alternatives will continue to be a fast-growing segment of the marketplace, whether as stand-alone solutions or as part of a portfolio alongside traditional investments.
"Demand for products in the alternative investment space is poised to grow as investors continue to seek investment opportunities and additional sources of return outside of traditional asset classes. The flexible nature of liquid alternatives strategies, combined with the skill and conviction of the managers implementing them, become the key drivers of return and risk management," says Mr Van de Walle.
Investment recommendation
At OCBC Premier Banking, both customers and Premier Banking Relationship Managers have access to rich market information provided by the OCBC Wealth Panel. With over 200 years of collective investment experience, the Panel's insights are available to help guide customers' investment decisions.
Here is the bank's recommendation:
- JPMorgan Global Macro Opportunities Fund
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