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