Financial markets have become unpredictable for investors after a series of stress tests. Due to high inflation and interest rates, stocks and bonds have become positively correlated for the first time in years. Due to this shift, HSBC Asset Management says that alternative assets offer exposure to investments with different drivers of returns and thus useful diversification benefits.
“The term ‘alternatives’ encompasses a wide spectrum of sub-segments, including infrastructure equity, private equity, venture capital, infrastructure debt, private debt and hedge funds,” as per HSBC.
The asset manager further dives further into details on the different types of alternative assets. HSBC says infrastructure assets are tangible assets that generate cash flows and come with an inflation-linked return profile. Infrastructure assets operate in industries with high barriers and thus they enjoy a dominant position.
Within private equity and venture capital investments, volatility is less of a concern as these are not publicly listed companies. Investor focus Is on long-term gains. While these assets are less liquid, investors get a premium.
“With late stage private equity, we favour companies with market leading positions in defensive or secular growth sectors… In venture capital, we have seen companies at early funding rounds enjoying more resilient investment demand, particularly given the significant dry powder available,” writes HSBC.
Talking about infrastructure debt and private debt, HSBC says that these assets can provide some protection as valuations are less impacted by interest rates. The centre of this type of debt is the floating rate structure.
Lastly, the investment management firm discusses hedge funds, which can play a significant role in capital preservations and portfolio diversification.
“In alternative assets, we can find a number of important characteristics that could assist in this regard (in a highly correlated market), including low correlations with traditional equity and fixed income assets, low sensitivity to market shocks, and insulation from rate hikes and inflation,” concludes HSBC.
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