The Rise of Alternative Investments: How Central Bank Stimulus has Forced a Rethink
By Ali Mizani Oskui, Founder of Swiss crypto investments manager FiCAS AG.
December — or the “silly season”, as it is fondly referred to in the financial markets — is a time when capital market participants network at industry events, attend conferences, and host client receptions. Back in December 2017, in an effort to boost their profile on the other side of the Atlantic, some big-name U.S. institutional investors arrived in London to conduct some overdue Transatlantic relationship building with media and prospective clients. Their presence caused a stir in London’s financial scene because of the new asset class which had taken hold of the investment conversation. Bitcoin, the world’s premiere digital currency, had experienced a historic price rally to nearly 20,000 USD per coin. This new asset class was capturing headlines across the mainstream media channels, leading many financial experts to ask — will institutional investors be buying bitcoin?
Monetary stimulus lays the groundwork for alternative investment structures
Fast forward to June 2020, and a CNBC interview with Rick Rieder, Chief Investment Officer, Global Fixed Income at Blackrock, asks whether the Fed’s role in capital markets is too much. The article reflects the paradox investors are currently caught between, amidst unprecedented monetary stimulus: sticking with traditional investments offering suppressed yields or exploring alternative investments that can generate substantial returns.
The current market backdrop has starved the investment community of decent market returns, which could ultimately lead to problems down the line for pension funds, sovereign wealth funds, and other big institutional investors in meeting their longer-term liabilities. Lofty equity valuations and suppressed bond yields, combined with historically low interest rates, begs the question — what viable alternative asset classes can investors turn to? The answer lies in innovative new investment structures that match a client’s risk profile in a regulatory compliant way. Herein lies the rise of alternative investments.
From vintage wine to structured bonds
Real-world assets including vintage wine, classical cars, fine art, rare stamps, and even music are just some of the new and innovative alternative assets that are being actively managed by investors across the world. Much of the time these assets are bought outright by the select investors, but a new trend has seen these assets bought increasingly into a portfolio or actively managed alongside bonds and equities.
Investors increasingly want to access and track these assets, and so what options are available to them? The obvious answer lies in exchange-traded funds (ETFs) or exchange-traded products (ETPs) that can be bought and sold on the secondary market, providing opportunities for investors to track and manage market outperformance. Similar to how an investor would buy stocks, these could then be purchased via a financial advisor at your local bank or broker.
Several new studies and reports show that investors are increasingly attracted to alternative assets, as a way to navigate the current market turmoil inflicted by the COVID-19 outbreak. Alternative asset classes are also increasingly being viewed as a means to hedge against geo-political risks, which has traditionally impacted more on holdings in bonds, equities, and mainstream commodities, such as oil, than on alternative investments in fine wines, watches, or digital currencies.
Regulatory green light opens floodgates for alternative assets
Just as investors are beginning to diversify into alternative asset classes as a means of protecting their portfolio against market volatility inflicted by the COVID-19 outbreak, regulators too are catching up to speed with new investor demands and trends. Regulatory catch up in these markets, such as the EU’s Markets for Financial Instruments Regulation (MiFIR), has resulted in new and regulatory approved investment products, usually taking the form of ETPs or ETFs. As stated by the European Securities and Markets Authority (ESMA), “MiFIR mandates newly established pre-trade transparency obligations and waivers and, in particular, the double volume cap (DVC) mechanism.”
New regulatory disclosure requirements in response to the 2008 global financial crisis, has forced an evolution of investor expectations around transparency standards. A recent article in Institutional Investor argued that these new regulatory guidelines around transparency, that are incorporated within new directive’s such as the EU’s MiFID II, along with the U.S.’s Division of Investment Management’s Disclosure Review and Accounting Office (DRAO), which requires investors have the information they need to make informed investment decisions, bode well for fund managers looking to attract a more diverse pool of investors, such as family offices and high net-worth individuals, because often these groups of investors seek greater diversification into alternative assets than the more dominant institutional investors, like pension funds.
Crucially, these regulatory disclosure requirements, as mentioned above, will bode well for alternative investment products, as transparency and disclosure standards required by regulators around the world will provide the catalyst that connects boutique asset managers with alternative asset investors, such as family officers wanting to explore new investment opportunities, or allow ETP providers to accurately source high net worth individuals that are worried about their overexposure to equities and bonds. Therefore, regulatory guidelines around transparency are, in a way, a free pass to improve dialogue and connect with potential investors of alternative assets.
Bond and equities will remain; but alternative assets offer more
Tracking the data of Bond Radar, a real-time news and data analytics service of the bond markets, shows that central banks and official institutions are increasingly becoming the main buyers of institutional-grade bonds. The dominance of official institutions in the credit markets is therefore forcing smaller institutional, and retail investors into other corners of the capital markets, pushing up demand for alternative assets that provide passive income and better alpha in return.
Alternative assets are primed for further take off as the capital markets come to terms with the fall out of COVID-19. Boutique asset managers should be ready to meet investors’ new found demands amid more dwindling returns in traditional markets. Just like December 2017, perhaps financial journalists will once again begin asking asset managers how they plan to tap more high-yield, alternative markets like bitcoin and digital currencies to meet clients’ growing expectations.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.