Scalper1 News
By DailyAlts Staff With interest rates at rock-bottom lows, the three-decade bull market in bonds is clearly in its last days. Meanwhile, stock markets from Asia to the Americas are undergoing various bouts of volatility, and valuations remain stretched, indicating recent bearishness may be far from over. These factors, along with the diverging policies of world central banks, are causing investors in traditional assets to rethink their allocation strategies. Allianz Global Investors makes “The Case for Alternatives” in the latest edition of the firm’s Analysis & Trends white paper series. Financial Repression Financial repression occurs when real interest rates are negative. In this way, savers can’t grow their wealth merely “risk-free,” and thus they’re forced to choose between losing ground to inflation or investing in riskier assets. Typically, financial repression has been the result of inflation outpacing the nominal interest rates on government bonds. But due to unprecedented monetary experiments, most European nations now have negative nominal yields on their sovereign debt. This isn’t something traditional “60/40” investors ever bargained for. (click to enlarge) Obviously, bond investors need to look elsewhere for income when they’re faced with negative nominal yields. According to Allianz, this has resulted in the growing popularity of “low-risk, low-return” alternative strategies to replace the role that bonds once played in investors’ portfolios. Monetary Consequences The negative yields on European bonds are a direct consequence of the European Central Bank’s policy of “quantitative easing” – i.e., buying bonds with newly minted money. When the central bank expands the money supply to buy bonds, it bids down interest rates. This not only props up the bond market, it also lowers the risk-free rate of return, thereby encouraging investors into riskier assets – like stocks. This is why Allianz says “ongoing expansionary monetary policy globally” should “support risky assets longer-term” – but in the meantime, “investors should be prepared for increasing volatility.” The Alternatives Universe Allianz GI points out that “alternatives” are not an asset class of their own, but a “universe” of investments that includes all of the following (and more): Commodities Currencies Real assets (timberland, fine wine, art) Intangible assets (patents, royalty streams) Private equity Alternative strategies The graphic below plots a variety of alternatives on two axes: The up/down axis considers liquidity from the perspective of the investor and the investment vehicle, while the left/right axis considers liquidity in terms of the underlying assets. For example, ’40 Act long/short equity funds are liquid from the perspective of the investor, and also in terms of their underlying assets. But while publicly traded REITs are just as liquid from the investor’s perspective (or nearly so), their underlying assets are far less liquid. Choosing the Right Alternatives Alternatives should be attractive to investors who realize the traditional “60/40” stock/bond diversification is unlikely to provide its traditional benefits going forward. Bonds are set to lose ground as interest rates rise, and stocks, which had been pumped up by monetary accommodation, are likely to come under increasing pressure, too. Whereas the income from bonds used to provide a cushion for “60/40” portfolios, even during bear markets, the ultra-low yields on U.S. and especially European bonds won’t have that effect in the immediate future. The question, then, is which alts should investors consider? According to Allianz, investors have two choices: Allocate broadly to alternatives via a custom advisory service; or Add single alternative strategies in order to achieve a specific investment objective. Allianz breaks down the alternative strategies pursued by hedge funds into four broad classes: Event driven, relative value, macro, and long/short equity. Given each strategy is designed to provide returns with limited correlation to the broad markets, and the broad markets have been bullish for years, the coming volatility and presumed end of long-time bull markets in stocks and bonds should result in a positive environment for many alternative strategies. For more information, download a pdf copy of the white paper . Scalper1 News
Scalper1 News