Archived insights remain available on the site. Please consider the publish date while reading these older insights.
publish

The future of alternative investments

Director of Alternatives Danny Sharp explores the future of alternative investments — discussing dispersion in today’s markets, the opportunities it presents, and the impact of the COVID-19 pandemic on the alternative investments landscape.

Views expressed are those of the author and are subject to change. Other teams may hold different views and make different investment decisions. The value of your investment may become worth more or less than at the time of original investment. While any third-party data used is considered reliable, its accuracy is not guaranteed.  For professional or institutional investors only.

Every day, this unprecedented global health crisis changes how we live and work. Understandably, this causes many people to take a short-term view. But at Wellington, we’re asking ourselves some key questions about the long-term future of alts.

1. What are the implications of a potential recovery from today’s crisis?

We believe the recovery from this crisis will not be in a straight line but instead will be much more idiosyncratic. We therefore think how and where investors allocate is likely to be more significant going forward. Today’s approach to asset classes, opportunities, and risks is likely to have a huge impact on future returns. After all, disruption, dislocation, dysfunction, and distress are all causing substantial dispersion that makes picking winners and avoiding losers critical.

In our view, the opportunity set an investor chooses as a starting point can dramatically alter their future return and risk experience in today’s environment full of dispersion and volatility. As we look to a recovery, we believe the key is for skilled managers to have the widest opportunity sets with the most dispersion to offer the greatest potential to create alpha.

2. What are some ways to play the increasing levels of dispersion in the market?

In our view, long/short investing maximizes the opportunity set for skilled managers and could work best in parts of the market hit by the four Ds. Though long/short had disappointed in an era where beta drove the market and market leadership was narrow, we are now seeing real dispersion and, in some cases, real carnage within sectors or regions. 

In today’s market with tremendous change and uncertainty, we think long/short might therefore be a way to bring alpha back into core portfolios. In some spaces, investors may want to play the potential alpha spread between winners and losers while also seeking to capture some of the beta — think health care, technology, and emerging markets. In other areas, beta exposure may be undesirable, but the dispersion may be so great that an alpha opportunity exists. There, using low or no beta approaches may harness potential alpha that is uncorrelated to markets — think energy, climate change, and retail.

3. How has the COVID-19 pandemic changed the alternative investments landscape?

We think COVID-19 has accelerated several structural changes to the alternatives landscape. For example, we think the pandemic has changed how private-company managements and their venture capitalists (VCs) view valuations, the benefit of finding the right long-term “growth partners,” and the importance of good governance and ESG. Hence, we have seen some real change in term structure and the return opportunity clients can potentially gain in the second half of the VC life cycle. The crisis has also caused clients to think about liquidity and business model risk. Since many late-stage growth companies have proven out their business models, we think they can offer attractive return opportunities with better liquidity than traditional earlier-stage VC investments.

Please refer to this important disclosure for more information.

Please refer to the investment risks page for information about each of the following risks:

  • Capital risk
  • Equity market
  • Liquidity risk
  • Long-short strategy
  • Manager risk
  • Short selling

Recommended for you

Vicious liquidity cycles, volatility, and the role of alternative investments
Dennis Kim and Lori Whiting, members of our Alternatives Team, consider the changing relationship between volatility and liquidity, and offer ideas on alternatives strategies for what they expect will be an enduring trend.
Archived insights remain available on the site. Please consider the publish date while reading these older insights.
publish
May 2021
Vicious liquidity cycles, volatility, and the role of alternative investments
,
publish
Central bank digital currencies: Debunking five common myths
We discuss how disruptive central bank digital currencies are likely to be and dispel some commonly held CBDC myths.
Archived insights remain available on the site. Please consider the publish date while reading these older insights.
publish
April 2021
Central bank digital currencies: Debunking five common myths
,
publish
<em>ESG insights for private companies —</em><br>Diversity, equity, and inclusion: FAQ
We answer some of our private portfolio companies’ most frequently asked questions on diversity, equity, and inclusion.
Archived insights remain available on the site. Please consider the publish date while reading these older insights.
publish
April 2021
ESG insights for private companies —
Diversity, equity, and inclusion: FAQ
,
publish
APAC Investment Forum 2021
Wellington specialists offer their views on the key themes transforming the investment opportunity set today.
Archived insights remain available on the site. Please consider the publish date while reading these older insights.
publish
March 2021
APAC Investment Forum 2021
,
publish
Bridging the gap in credit portfolios with a long/short strategy
Amid massive changes in the credit market and growing demand for fixed income diversification, the authors explain why long/short credit strategies could help round out a portfolio of traditional and private credit investments.
Archived insights remain available on the site. Please consider the publish date while reading these older insights.
publish
March 2021
Bridging the gap in credit portfolios with a long/short strategy
,
publish
Mission critical: The vital role of alternatives in pursuing investment success
Multi-Asset Strategist Cara Lafond considers three alternatives ideas for the current environment, including private equity vintages that coincide with market downturns; long/short directional strategies that may aid the pursuit of stability across the cycle; and long/short risk-mitigating strategies that complement other diversifiers.
Archived insights remain available on the site. Please consider the publish date while reading these older insights.
publish
February 2021
Mission critical: The vital role of alternatives in pursuing investment success
,
publish
Surviving the stress test: Companies adjusting to the new landscape
The pandemic has forced companies around the world to revisit their business plans and processes. Michael Carmen, co-head of Private Investments, moderates a discussion with three CEOs about how they have been navigating this time of crisis.
Archived insights remain available on the site. Please consider the publish date while reading these older insights.
publish
January 2021
Surviving the stress test: Companies adjusting to the new landscape
,
publish
Shorting stocks in China: The emerging opportunity
Two of our emerging market investors explain why shorting appears to be at an inflection point in the world's second largest equity market, where idiosyncratic conditions may offer a unique environment for generating alpha and diversifying risks.
Archived insights remain available on the site. Please consider the publish date while reading these older insights.
publish
January 2021
Shorting stocks in China: The emerging opportunity
,
publish