Alternative funds have “significantly underperformed both equity and bond benchmarks” over the last five years, Lonsec Research said, with the median fund returning a “modest” 2.8 per cent in the twelve months to 31 August 2016.
Despite this, alternative funds are still seen by investors as “a valuable addition” to portfolios, which Lonsec Research general manager of alternatives and specialised research Michael Elsworth said is likely driven by current macroeconomic conditions in which it is “increasingly difficult to deliver alpha”.
“Essentially, investors are assessing the risk and return trade-offs offered by equities and bonds, and they don’t particularly like the look of either at current levels,” he said.
“Yields have been driven to record lows, while share markets have been priced ever higher, and investors are keen to find something that is not correlated with these major asset classes.”
Lonsec Research said investors were afraid that “correlations between traditional asset class returns may converge” and were looking for strategies less likely to display correlation of returns with bonds or equities.
Alternative assets are also becoming increasingly popular with large fund managers, with research from Willis Towers Watson finding alternatives to be the largest growing asset category among the world’s 500 largest fund managers.
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