16 March 2023
The global alternative investment market is growing rapidly. Although estimates vary, most studies point to an expanding market. An October 2022 report from Preqin, a research and analytics company, expects the global market for alternative investments to grow to $18.3 trillion in five years, well above its $9.3 trillion size in 2021.
Alternative assets typically include any asset other than ‘traditional’ equity, bond and currency investments. One type covers financial instruments that take alternative approaches to investing such as hedge funds, private equity and debt, or distressed funds. Another category involves ‘real’ or physical assets ranging from commodities, precious metals, infrastructure or real estate. Cryptocurrencies and non-fungible tokens are among the more recent markets that have made inroads with wider audiences.
Another category falls under the term ‘collectibles’ and includes items such as art, antiques, watches, classics cars and, of course, fine wine.
The current period of uncertainty stemming from the war in Ukraine, rising inflation and cost-of-living concerns is prompting more investors to seek diversification to manage risk. Before this, many investors looked to alternatives as a source of growth amid the extended period of low interest rates and high equity valuations that pervaded in the wake of the Global Financial Crisis and more recent COVID outbreak.
This greater demand could add to the performance potential of many alternatives, especially the so-called collectibles. These real assets generally have fixed supply levels and growing demand exerts upward price pressure.
Potential benefits of alternative assets
Alternative assets can help de-link an investment portfolio’s performance from the ups and downs of the economic cycle. Alternative assets often have different drivers of performance to traditional 60-40 portfolios, which means they may have lower correlation, or sometimes negative correlations, to equity or bond investments.
Hedge against market risks
Alternative assets’ different drivers of performance often mean the risks facing equities or bonds will not impact them in the same way. This is not to say alternatives are completely insulated from market risks, but their different market dynamics can provide a degree of insulation in the event of a sudden shock to the macroeconomic environment.
Potential enhanced returns
Alternative assets can offer new frontiers for investors to identify alpha opportunities and boost the return potential of their portfolio. The market for many alternatives is often less developed and less efficient than traditional financial markets, opening the door for selective investors to uncover growth and arbitrage opportunities.
Despite these possible benefits, collectible alternative assets carry their own set of risks. They are often less regulated than mainstream markets and can have shorter track records or less data available for transparent decision making.
The plummeting prices of most cryptocurrencies in 2022, which is raising doubts about the future shape of this still-young investment market, illustrates the risks involved in some alternative asset classes. It is of the utmost importance for investors to conduct rigorous research before selecting which alternatives match their specific requirements.
In our next blog, we outline the characteristics of fine wine as an alternative investment and explain why we believe it can make an important component of an investment portfolio.