Alternative investments for periods of inflation

With inflation at its highest in decades, Michael Sager, executive director, multi-asset and currency management at CIBC Asset Management, said alternative investments can help mitigate the impact on portfolios. 

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“There are a range of alternatives, and they all do something different and something complimentary,” Sager said.

To hedge inflation risk, he looks to infrastructure and real estate. 

For infrastructure, Sager said one of the core elements is multi-year contracts that are linked to inflation, with scheduled price resets.

“The pricing power embedded in those contracts really helps mitigate any negative impact of inflation on investment returns,” he said. 

Similarly, within real estate, some rental properties have a periodic reset within contracts that allows rent to keep up with inflation, meaning investment returns can be compensated for high and persistent inflation, Sager said. 

Hedge fund strategies can also hedge against inflation when used appropriately.

“We are not typically focused on a single hedge fund strategy,” Sager said. “Instead, it’s important to build a sub-portfolio with exposure to a number of different strategies. By doing that, you get much more diversification in portfolios, including diversification against inflation.”

Sager said he expects returns for alternative investments to outperform public market returns, even after this year’s dramatic drawdowns in both equities and fixed income. 

“Public market-expected returns still appear relatively modest compared to the past 10 years,” he said. “One of the benefits of alternatives, as well as diversification and an ability to hedge risks like inflation, is that they offer enhanced returns.”

With the outlook for public markets so uncertain, Sager said there’s a strong case for building diverse portfolios that include alternative solutions to enhance performance and diversify assets “in the face of a number of risks.”

This article is part of the AdvisorToGo program, powered by CIBC. It was written without input from the sponsor.

Maddie Johnson

Maddie is a freelance writer and editor who has been reporting for Advisor.ca since 2019.