What’s Driving Multi-Asset Funds Into Alternatives

Traditional assets have displayed higher-than-usual return correlations in a possible long-term shift, according to Cerulli.

Nathan Laine/Bloomberg

Nathan Laine/Bloomberg

Many multi-asset funds are increasing their exposure to alternative assets after the coronavirus sell-off this year raised their concerns about diversification, according to Cerulli Associates.

Fund managers want to mitigate the impact of highly-correlated, mainstream assets dropping in a market downturn, Cerulli said in a research report released Monday. The consulting firm said allocations to areas such as real estate, infrastructure, private equity, hedging strategies, and precious metals will keep rising as European managers seek alternative assets for diversification.

“In Europe, the March sell-off triggered by the Covid-19 panic disrupted traditional correlation patterns,” Cerulli said. “Gold and infrastructure debt are considered among the most effective diversifiers, despite their shortcomings.”

As stock markets plunged in March, Cerulli found it “alarming” that assets such as corporate and government bonds, currencies, and oil moved in the same direction as equities. About 40 percent of institutional investors polled by CoreData Research in June and July said they planned larger allocations to alternative strategies over the next three to five years, with 90 percent citing diversification as their main reason, according to the Cerulli report.

Institutional investors now allocate an average 26 percent of their assets to alternative strategies, up from 24 percent last year, the consulting firm said, citing CoreData.


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Government intervention to support markets and the economy during the Covid crisis has underscored the difficulty of building truly diversified portfolios.

“The ‘everything rally’ has made clear just how highly correlated asset classes, strategies, and markets have become, fueled by global monetary and fiscal stimulus,” Justina Deveikyte, associate director of European institutional research at Cerulli, said in the report. “With assets continuing to display higher return correlations than is usual, there is a view that the traditional asset class relationships may have shifted in a more long-term sense.”

Government bonds have “lost their potency as a diversifier in an economic crisis” because yields have fallen so low, according to the report. Cerulli said investors have turned to precious metals as a safe haven and to hedge against inflation risks as a result of their expectations for ongoing stimulus.

Infrastructure has a similar appeal for investors who are turning to alternative managers, according Cerulli. Heather Fleming, head of institutional business at Gresham House Asset Management, said in the consulting firm’s report that exposure to forestry and sustainable infrastructure, including renewable energy, waste recycling, and agricultural technology, “provides long-term investment opportunities that behave differently without introducing higher levels of risk.”

Diversifying into alternative assets, which also have been hit by the pandemic, won’t be an easy fix for portfolio managers.

“Growing demand for alternatives creates its own problems, including higher valuations and longer-term issues such as high charges, poor liquidity, and concerns over transparency, which are still to be satisfactorily addressed,” Deveikyte said.