People have different motivations for investing. Some hope to generate enough income to sustain their lifestyles. Others may be seeking opportunities to grow their wealth over decades, whether to fund a legacy for generations or have a comfortable retirement. Financial goals are different for every individual.
That said, many of the challenges facing today’s investors are universal.
The rise in inflation necessitates the pursuit of higher expected returns to grow purchasing power over time.
Alpha opportunities have generally become harder to find in “traditional” stocks and bonds. Last year’s sell-off in bonds left investors seeking more reliable portfolio protectors.
The appetite for steady income generation is more prevalent than ever before. Alternative investments can assist investors in overcoming many of these challenges.
Access to broader opportunities
Historically, equities have enabled investors to grow their capital over time.
However, we have seen a 45 per cent decline in the number of publicly traded companies since 2000, and there are now more than seven times more private companies than public companies with $100 million in revenue.
This is especially true in the GCC, where part of Saudi Vision 2030 is that the private sector should contribute 65 per cent of gross domestic product by 2030 (from 40 per cent in 2016).
Limiting your investment approach to public markets means missing out on the vast opportunity set in private markets.
Private equity managers often take a hands-on approach, driving operational improvements in portfolio companies.
With this expanded access and more comprehensive toolkit, private equity has consistently outperformed global public equity markets by 5 per cent to 10 per cent annually.
2022 was the worst for the stock markets since 2008 and for core bonds on record, leaving many investors exploring alternatives to diversify their portfolios.
This is where hedge funds play a crucial role. They can help minimise portfolio volatility by utilising hedging strategies and accessing niche exposures that may generate uncorrelated return streams.
Therefore, hedge funds may help a portfolio to compound more efficiently.
Real assets, too, can act as powerful diversifiers in a portfolio.
Infrastructure assets, in particular, can offer exposure to essential services with resilient demand and inflation-linked revenue.
Similarly, real estate tends to offer historically low correlation to public markets, including publicly traded real estate investment trusts (Reits).
In July 2022, Dubai introduced a new law aimed at promoting the growth of Reits in the emirate. As part of efforts to boost the emirate’s status as a global destination for real estate investment, the law provides various benefits to real estate investment funds.
Attractive yield generation
Investors navigating the universe of publicly traded bonds must frequently accept lower credit quality if they seek higher return potential.
For those investors, private credit may be worth a look. Private credit has historically offered premium yields and returns with greater structural protections relative to other fixed-income opportunities.
Furthermore, as the size of the average high-yield borrower has grown, many borrowers are too small to tap into public credit markets; conversely, larger enterprises may not want to risk the uncertainty or lengthy processes that come with accessing traditional capital markets.
Private lenders can bridge this financing gap, offering investors the chance to collect a premium for providing capital where it’s scarce.
Overall, those with the desire or need to overcome today’s investment challenges would be remiss not to consider alternative investments.
The alternatives universe has become so broad, offering an enormous array of asset classes, styles, combinations, frameworks, models and vehicles.
As always, but especially in alternatives, due diligence and selectivity are essential as performance can vary widely.
Steven Rees is head of investments for the Middle East and North Africa at JP Morgan Private Bank