Take a walk on the Alts side

READERS recognising the play on words in the title may know from where it is sourced.

It is a song by Lou Reed, called Take A Walk On The Wild Side. The artist and the song have evolved to be mainstream classics.

Likewise, today we are seeing investment strategies that have previously been labelled "alternative" being considered much more as a part of mainstream investing. Or, put another way, we are seeing alternative investments increasingly finding their way into clients' portfolios, and at an increasing percentage. Alternative investments are taking a walk toward the mainstream.

Let's start by defining alternatives. At Citi Private Bank (CPB), private equity, real estate, and hedge funds come under the umbrella of alternatives. What do we see driving and influencing this transition from alternative to mainstream? While the answer may be multifaceted, there are some key characteristics we can identify:

Seekers: Investors "seeking" something, for example, a certain level of return, or a source of income.

Sophistication: An increasing sophistication in clients' portfolio construction considerations.

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Access: Alternative investments offering access to particular investments, or style of investing not readily available through more traditional sources.

We are also observing that the underlying categories that make up alternative investing are continuing to attract further assets and increase their assets under management (AUM). This is projected to grow further in the coming years.

For hedge funds, this may indeed surprise people. The sector has not only proved its resilience but has continued to grow consistently post-Global Financial Crisis (GFC). That walk to the mainstream resembles more of a steady march.

"Seeking" investors can have multiple motivations. Often, they are seeking to maintain a certain level of return, or at least, return expectation. That regularly leads to strategies that have a greater flexibility of investment mandate, strategies considered better suited to the path ahead rather than previously travelled, and strategies that are considered "less crowded" and so are more likely to offer that holy grail of investing - Alpha.

Increasingly, many investors find themselves drawn to alternatives as they seek yield or income. As yield has been harder to maintain from traditional investment sources, investors have been allocating to yield-producing strategies across the aternatives landscape. Yield is also often viewed as a fair trade-off for liquidity.

A trend we are observing throughout Asia-Pacific is the increasing sophistication of clients. That sophistication is accompanied and often led by a curiosity and appetite for investing in alternatives. When considered, it is not surprising.

As a generation of institutional investors were influenced by the late David Swensen's "Endowment Model" for investing, which utilised alternatives extensively, closer to home the likes of GIC and Temasek's activities in alternative investing provide positive reference points as clients mature in their sophistication.

Clients are curious. Clients are active. Clients are open minded. Education, guidance, and insights are being sought. Curiosity often leads to education, then in turn to investment, which over time leads to experience, and so the cycle repeats.

With engagement, clients are increasingly coming to realise the world of hedge funds isn't just global macro, nor is private equity just buyouts, and nor is real estate just trophy skyscrapers. The outcome to all this, in our experience, is an increasing number of investors active in this space, and as increasing allocations in their portfolios.

The curiosity and open mindedness of many "next-gen" clients to the landscape of alternatives is another observed trend. This experience is also bearing out in industry predictions of continued projected AUM growth.

What the above considerations have in common, whether they be hedge funds, private equity (including private credit), or real estate is access.

More precisely, being an access point to participate in these opportunities.

Alternative investments provide access to styles of investing not available to them via traditional products or channels.

Where alternatives overlap with strong themes or unstoppable trends with which a client is comfortable, the bridge to cross hasn't been a big one. These include healthcare, technology, and China.

For more experienced clients, alternatives provide a bridge to a more specialised execution of the theme in their portfolios. In healthcare, it may be accessing earlier stage biotech companies (private markets) or long-short managers playing the disruption (hedge funds).

Similarly, in technology, being able to access the disruptors and unicorns while they are still private companies (private equity) and playing disruption (hedge funds) have also been popular, while leveraging the increased connectivity with all of these technological developments through data centres, telephone towers and cells, and fibre has also resonated (real estate).

Outside of themes or unstoppable trends, what else has attracted clients to alternatives? A resilient topic has been pre-IPO (initial public offering) investing. As the name suggests, it is investing in private companies intending to IPO at a point in the medium term.

With many companies staying private for longer and already household names well before they IPO, accessing and assessing these opportunities is usually the domain of alternatives managers.

Likewise, for clients seeking diversification, accessing specialised differentiated investments such as sports remains largely the domain of alternatives managers. Real estate, an evergreen area of client interest, has proven to be attractive in areas such as hospitality and opportunistic development and redevelopment.

As clients gain education, insights, and experience in alternatives, there is an appreciation of the risks that accompany the return expectations.

However, there is often a newfound respect of the risk focus and risk management disciplines utilised by alternatives managers in their pursuit of return.

Once again, there is curiosity leading to education, leading to investment, which over time leads to experience, and so the cycle repeats.

With a backdrop of curiosity, education, experience, and appetite, alternative investing has become more popular than ever. Clients seeking out investments that satisfy their portfolio construction goals, with an increasing sophistication, are leading to alternative investments shedding their mystique. Come join us in our march, as more clients "take a walk on the Alts side".

• Brad McCarthy is director, Alternatives, South Asia at Citi Private Bank