Use of Alternatives Category is incorrect: Pengana Capital
The grouping of a wide range of ‘non-traditional’ strategies into an Alternatives category is:
Of limited value for investors
Makes very little sense in portfolio construction
When constructing portfolios, it has become quite common in the retail space to lump all “non-traditional” strategies into an Alternatives category that often includes various types of hedge funds, private equity funds, property and infrastructure. Whilst this might simplify the portfolio construction process, it makes very little sense and fails to provide investors with the diversification benefits that they so desperately need.
Russel Pillemer, Chief Executive Officer, Pengana Capital said that, “In our view, the Alternatives category should be replaced by a Low Correlation category that includes all strategies that exhibit truly low underlying correlation with equity markets. It is this category that has the potential to provide the most significant diversification benefits for portfolio construction”.
Examples of low correlation strategies include equity market neutral, special events and CTA’s.
“The increased use of this category is clearly evident among family offices as well as some sophisticated high-end dealer groups that are looking for solid returns irrespective of equity market direction. There is a strong demand for Low Correlation strategies and, in particular, those strategies that offer good liquidity (i.e. daily or monthly) to investors. What is particularly interesting to note is that many of these investors are now using Low Correlation strategies at the core of their portfolios”.
Strategies that are currently included in the Alternatives category but are actually likely to be quite highly correlated with equity markets should logically be included in the Long Equity category. Examples of such strategies are long biased hedge funds and private equity funds.
Illiquid strategies (e.g. Private equity, unlisted property and unlisted infrastructure) often get included in the Alternatives category in portfolios because they are perceived to exhibit low correlation with equity markets. However, this is a false premise as it driven by the fact that these strategies are only valued at infrequent intervals – and very often using methodologies that smooth returns. This is clearly evident by the correlations displayed by their listed counterparts – as well as the losses suffered by investors seeking to exit these types of investments in market downturns. The use of these strategies to provide true diversification in portfolios is therefore incorrect and potentially very dangerous for investors who might require liquidity.
Damian Crowley, Director of Distribution, stated that, “Financial advisers who are concerned about the possibility of equity markets failing to deliver adequate returns over the coming years or about the prospects of a severe market correction should be constructing their portfolios accordingly. They should eliminate the use of the Alternatives category and replace it with a Low Correlation category – and give it a much greater weighting in their portfolios. They will surely sleep much better at night knowing that they have provided their clients with such protection.”
Media Contact:
Russel Pillemer
Chief Executive Officer
Pengana Capital
(02) 8524-9932
0412 501 842
russel.pillemer@pengana.com
www.pengana.com