In its new strategic asset allocation (SAA), UBS has recommended a 12 to 15 per cent allocation to alternative investments, including hedge funds, real estate and private equity.
In a monthly CIO update released on Friday, UBS global chief investment officer, wealth management Alex Friedman said the alternative assets are often discredited for being illiquid, opaque, and expensive, but hedge funds can serve as an effective portfolio diversifier for investors with limited cash-flow requirements.
“With markets normalising, correlations failing and valuation dispersion still relatively low, we see a particularly good opportunity for managers employing equity long-shirt strategies,” he said.
“In recent years, hedge fund returns may have looked unappealing relative to equities or high yield corporate credit, but as we enter an environment of lower returns in all financial assets, funds delivering consistent returns of around four to six per cent, with volatility similar to that seen in corporate bonds, will appear increasingly attractive.”
The ability to extract an illiquidity premium from private equity will be important in a low return environment, Mr Friedman said.
“We recommend a 12 to 15 per cent allocation to alternative investments in our new strategic asset allocation,” he said.
“Hedge funds represent an important part of that allocation, which can also include private equity and real estate.”
Due to the volatile nature of currencies, UBS recommends hedging exposure to foreign currencies in 2014.
“Investors taking unhedged FX exposure may be unwittingly taking on extra risk,” Mr Friedman said.
“As a result, our currency positions within our recommended SAAs are hedged, with the exception of those in emerging markets, where hedging costs can be prohibitive.”
Mr Friedman was the former chief financial officer of the Bill & Melinda Gates Foundation.
