Investors must revisit assumptions on alts: Mercer

In a post-crisis environment, investors need to rethink their rationale and approach to alternative assets and ensure they have exposure to the asset class for the right reasons, according to investment consultants from Mercer.

Dragana Timotijevic, Mercer’s global investment leader for alternative beta investments, says the calculus has changed over the past 12 months, and that institutional investors should revisit their goals with regard to alternatives.

“We’ve recently experienced an alternatives bubble as investors chasing alpha or above-index returns, sought greater exposure to alternative asset classes such as hedge funds, many of which have not delivered performance in line with expectations,” says Timotijevic. “Now, as the dust has settled on the global financial crisis, investors need to rethink their approach to alternative portfolios to ensure they offer exposure to genuinely diversified sources of return.”

She explains that investors need to increase their knowledge of the underlying risk premia of alternative asset classes and conduct more research on each alternative asset class to fully understand its role within a portfolio.

New opportunities Timotijevic outlines several promising alternative asset classes, including private debt, aircraft leasing and insurance linked securities, all suited to an environment where access to capital is at a premium.

“Aircraft leasing is an asset class that presents an interesting investment opportunity for sophisticated investors with tolerance for illiquidity,” says Ryan Bisch, a senior associate with Mercer. “Insurance linked securities transfer insurance risk to a capital market-based security vehicle or fund, separate from the insurance originator. This type of investment plays an increasingly important role in the operation of insurance companies that insure extreme events, such as earthquakes and hurricanes.”

Timotijevic says private debt investments are also currently offering above-average risk adjusted returns.

“The current opportunity is compelling since banks have withdrawn from debt funding as businesses seek new funding and roll-over financing and private debt lending rates have moved higher,” she explains. “The high returns available in the current period may be locked in for a number of years, yet the underlying risk will likely decline with improvements in the macro economy.”

(11/10/09)