Caravel Partners

Benedict Carter
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Nowadays, Wealth Managers often use alternative assets to help build their clients’ portfolios.

At this present moment, hedge funds, commodities and asset-backed lending can all protect portfolios from what might well be coming: the shift from the world of QE, which has depressed government payments on soveriegn bonds to negative rates, to the world of QT, or quantitative tightening. This transition may well involve bouts of serious market volatility. Some wealth managers think it’s time to look to alternatives.

This  might mean looking at hedge funds again, such as global macro or long-short hedged funds.

“You can diversify an equities-heavy portfolio with an exposure to commodities, and more specifically to gold,” says Stéphane Monier, chief investment officer at Swiss bank Lombard Odier. “The precious metal tends to perform well in higher volatility and weakening US dollar environments, especially if market participants start having doubts about the effectiveness of monetary policies,” he adds.

Hedge funds and gold are far from the only option.

In fact, it is this writer’s view that alternative investments are not only for periods of expected volatility, but can boost a portfolio’s performance without taking on excessive risk at all times. Alternatives are best when used to diversify financial portfolios. In other words, instead of putting all of your money in stocks, put some in stocks, some in bonds, and some in alternative investments like private equity, or even fine art and wine.

Let’s look at the case of Bob Jones, a senior manager with an oil company. Bob works in Qatar and has accrued the sum of $200,000 in the bank which he now wants to invest. He is 48 and does not expect to retire for at least fifteen years. He has no major capital need for the next two to three years. His Advisor conducts a risk assessment with him, and finds that Bob is a middle of the road investor. He is prepared to take some short to medium term risk, and desires growth of his money, but does not want any major risk to the overall capital investment.

His Advisor provides him with the following asset allocation:

 The $200,000 has been earning 1.5% sitting in a bank account.

  • Daily-traded ETFs because they are cheap ways of tracking the equity markets
  • A daily-traded specialist sector fund

If market conditions make it necessary, these funds can be sold in one day and returned to the portfolio’s cash account.

  • A hedge fund providing LIBOR + 4% in any market conditions.
  • Two secured UK-issued corporate bonds which pay a net 8% per annum, interest paid half-yearly (A) and quarterly (B). One is a 12 month issue, the other lasts 18 months.

Bob has exchanged 1.5%, or $3,000 a year profit, for an overall expected net profit of 7.5% or $15,000. He will keep the investment for at least ten years. At the end of ten years, Bob should expect a total value of around $412,000. His investment has doubled.

The role of alternatives is clear: to reduce overall portfolio volatility while boosting growth.

Please contact me to discuss your own portfolio investment objectives.

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