And according to Hyett, these have the potential to grow even when the wider economy is shrinking, thanks to increased uptake of new products.
He adds: “Take Apple for example, it grew sales through 2007-12 as customers rushed to buy the iPhone despite the financial crisis rocking the wider economy.”
The key benefit of investing in alternative assets, according to Kent, is diversification, and in some cases the ability of an investor to be more selective about the asset class and investment structure to which they are exposed.
But with cash and bonds providing a tangible return once again, alternative investments need to prove their long-term merits in investors’ portfolios.
With the base rate at 5 per cent in the UK, Doherty says there is “little point” in holding a low-risk hedge fund mandate targeting a low single-digit return ad infinitum.
He adds: “We continue to see the merit of selective allocation to alternative investments. The diversification benefits they bring through the provision of different sources of risk and return can be complementary to the core ‘traditional’ investments comprising the majority of our clients’ portfolios.
“Whether this is through an allocation to differentiated hedge fund strategies, access to high-quality assets with predictable, contracted (and often inflation-linked) cash flows exposed to several structural trends, or the prospect of long-term value creation through intensive engagement with company management in the private space, these investments have a role to play.”
Role in a portfolio
So how alternative assets fit into a portfolio will depend on the role they are playing and the investment exposure being considered, for example, whether it is for diversification purposes or providing alternative sources of income.
Doherty adds: “[Alternative investments] can offer diversification benefits, providing access to investments with a lower correlation to publicly listed assets.
"This can be achieved by providing access to investments/sectors that are either not available through public markets, or alternatively have only a limited presence.
“They can provide alternative sources of return, thereby complementing a more traditional portfolio comprising predominantly equities and bonds. They can provide access to alternative income streams, in some instances inflation-linked.
“Lastly, they can offer high risk/return potential through investments into early-stage companies with the potential for long-term growth or alternatively later stage exposure to private assets with a clear strategy to expand their presence in established markets.”
To understand how these assets fit into a portfolio, Bragazza says it is very important to identify the funding source within portfolios, compatibly with their objectives and clients' expectations.
