Alternative investments in portfolios: Their time has come

THE 60/40 strategy, once hailed as the holy grail of diversification, involves investing 60 per cent of a portfolio in equities and 40 per cent in fixed income. Despite decades of good performance, investors are losing faith in this stalwart of investing. The main reasons for this are the persistently low bond yields, and increasing correlation between equities and bonds.

Years of monetary accommodation by central banks, coupled with technological disruption globally, have resulted in bond yields staying at historic lows. According to the Callen Institute, the supposedly "well diversified" 60/40 portfolio would possess 99.85 per cent equity-risk concentration. However, when real estate, high yield bonds, and hedge funds are added, the equity risk concentration falls to 79 per cent. This suggests that bonds alone are no longer effective for diversification, and there is a need for alternative investments as an asset class.

Alternatives are investments outside the traditional asset classes of stocks and bonds. Private equity, private debt, hedge funds, infrastructure, and gold are examples of Alternatives. A rising interest in Alternatives has seen its assets under management (AUM) grow from US$7.2 trillion in 2015 to US$13.3 trillion at the end of 2021. As investors continue to venture beyond traditional asset classes, Alternatives' AUM is expected to exceed US$20 trillion in the next five years.