Once reserved only for investors with significant dollars to allocate, alternative investment options have expanded into new structures and solution types, giving more investors access to this diversifying asset class. “Traditional” 60/40 portfolios (composed of 60% stocks, 40% bonds), often thought of as the starting point for basic asset allocation, may not be sufficient to generate the returns required to meet individuals’ long-term investment goals. For qualified investors, we believe alternative investments have the potential to add incremental return, in addition to improving the overall risk profile of portfolios through diversification.
What are alternative investments?
Alternative investments span a range of sub-classes, each with distinct risks, expected returns and drivers of those returns. A few common examples are explained below.
Private equity & private debt: Private equity offers access to privately held companies and debt instruments not generally available on the public market. Examples of private equity strategies include leveraged buyouts, venture capital and growth capital. Examples of private debt strategies include small/middle market lending and distressed credit.
Real assets (private real estate and private infrastructure): Private real estate includes physical, direct, or non-exchange traded real estate and may take the form of equity through direct ownership of property or debt via mortgage claims on the property. Private real estate funds are often limited partnerships that manage portfolios of privately held real estate investments. Private infrastructure involves the ownership of real assets, by investing in private or publicly traded vehicles, that provide essential economic and social benefits to society.
Examples of private infrastructure include assets in the communications sector (e.g., wireless telecommunication, satellites); the energy sector (e.g., oil and gas drilling); the transportation sector (e.g., airport services, toll roads, parking); and utilities (e.g., renewable energy, sewage and waste management).
Hedge funds: Hedge funds are privately organized investment vehicles that manage portfolios of securities and derivative positions using a variety of strategies with the goal of generating positive returns regardless of the performance of the traditional investor markets. The four main types of hedge fund strategies are event-driven, relative value, macro, and equity hedge.
Derivative strategies: Common derivative strategies include options and structured notes. Options are sophisticated, non-traditional solutions targeted at enhancing after-tax returns, managing risk, or augmenting a long-term investment horizon. Listed option strategies include writing covered calls to enhance income, purchasing put options for protection, and placing equity collars to manage risk. A structured note is a debt security with a maturity of more than one year, with performance linked to the performance of a reference asset such as an equity or equity index, interest rates, or alternative asset classes.
Why now?
This year may present compelling opportunities for alternatives investors due to current market dynamics. We believe private markets could experience a pickup in merger and acquisition activity as well as new opportunities in venture capital, private credit and select categories of real estate.
With proper due diligence and an understanding of benefits and risks of various strategies, alternatives may be a useful addition to investor portfolios. At PNC Private Bank®, our experienced advisors routinely evaluate your portfolio and provide specialized advice to you and your family based on current market conditions. Contact your PNC Private Bank advisor for help in facilitating a disciplined review of your current portfolio to determine if an allocation to alternatives is appropriate for you.
