Alternative investments are playing an increasingly important role within investors’ portfolios, according to research by BlackRock, the asset manager behind the iShares brand of ETFs.
BlackRock found that investors allocated between 21% and 25% of their portfolio to alternative investments during 2018.
In its latest annual ‘Asset allocation and trends in EMEA portfolios‘ report, based on an analysis of over 600 client portfolios, BlackRock found that investors allocated on average between 21% and 25% of portfolio assets to alternative investments during 2018.
Allocations to alternatives were fairly consistent across risk profile with ‘Conservative’ portfolios averaging a 25% exposure to the asset class, while ‘Aggressive’ and ‘Balanced’ portfolios allocated averages of 23% and 21% respectively.
The primary reasons why investors allocated to alternatives were to enhance yield and diversify risk in multi-asset portfolios.
BlackRock notes that the use of alternative investments as risk diversifiers was particularly effective, despite a relatively large proportion of assets assigned to the asset class. BlackRock found that alternatives contributed on average only 2% towards risk allocation.
Hedge fund strategies were most in demand, accounting for 43% of the total allocation to alternatives, followed by property (22%), convertible bonds (17%), and commodities (7%).
Democratization
Alternatives were once perceived to be the exclusive domain of institutional and high-net-worth investors. But with the democratization of investment ETFs have helped usher in, mainstream investors can easily access alternative strategies via ETFs. And there is an increasing array of products at investors’ disposal.
Hedge Funds
Hedge fund strategies can be effective diversifiers, particularly during severe market downturns. When assessing hedge funds strategies during the maximum drawdown period of the MSCI World Index in the last 15 years, BlackRock found that long/short equity hedge funds (represented by the HFRX Equity Hedge Index) resulted in excess annualized returns of 24%, event-driven strategies (HFRX Event Driven Index) of 29%, and macro/CTA strategies (HFRX Macro/CTA Index) of 54%.
BlackRock notes that the disparity in performance implies that, whilst hedge fund exposures can be effective diversifiers and potential return enhancers, strategies can differ vastly from one another. The firm suggests holding diversified exposure to multiple hedge fund strategies in the long term.
In Europe, ETF investors looking for broad hedge fund exposure could consider the UBS ETF HFRX Global Hedge Fund Index UCITS ETF which tracks the HFRX Global Hedge fund Index. This index offers an asset-weighted representation of the global hedge fund universe. Other options include the Lyxor Scientific Beta Developed Long/Short UCITS ETF or the JPMorgan Equity Long-Short UCITS ETF, both long/short equity strategies; or the JPMorgan Managed Futures UCITS ETF which is essentially a CTA-style fund.
Property
Within the property sector, BlackRock is the leader in the ETF space. In Europe, through its iShares brand, it offers a range of ETFs linked to FTSE EPRA/NAREIT indices. Funds track listed real estate companies and real estate investment trusts (REITs) in the global developed, US, European, UK, and Asia markets, and come with expense ratios ranging between 0.40% and 0.59%.
For broad coverage, investors could consider the iShares Developed Markets Property Yield UCITS ETF. This fund has $3.1 billion in assets and provides exposure to developed markets real estate companies with a one-year forecast dividend yield of 2%. The fund is listed on LSE, Xetra, Borsa Italiana, Euronext Amsterdam, and SIX Swiss Exchange.
Convertible bonds
In terms of convertible bonds, BlackRock offers the iShares Convertible Bond ETF (ICVT US) in the US. The fund is linked to the Bloomberg Barclays US Convertible Cash Pay Bond > $250MM Index which includes US dollar-denominated convertible bonds from issuers globally. It has $340 million in AUM and comes with an expense ratio of just 0.20%.
Within the universe of Europe-listed ETFs, investors might wish to consider the SPDR Thomson Reuters Global Convertible Bond UCITS ETF (GCVB LN) which has $860m in AUM and comes with an expense ratio of 0.50%. The fund is linked to the Thomson Reuters Qualified Global Convertible Index.
Commodities
The majority of investors appear to already recognize the benefits of gaining exposure to commodities through ETPs, as 96% of the total allocation to commodities across the sample of portfolios was directed through an ETP wrapper. Up from 81% in 2017.
BlackRock currently offers three diversified commodities products in Europe as well as four single-commodity ETCs. Of note are the iShares Diversified Commodity Swap UCITS ETF and the iShares Physical Gold ETC. The former costs just 0.19% and provides exposure to the Bloomberg Commodity Index, a well-known broad benchmark for the performance of commodities which covers components in the energy, grains, industrial metals, precious metals, softs, and livestock sectors. The latter provides exposure to physical gold and comes with an expense ratio of 0.25%.
In Europe, other notable providers of commodity ETFs include WisdomTree and Invesco.