Some portfolio constructors have created an alternatives category to hold investments that differ from standard categories, resulting in that category becoming “meaningless”, according to Russel Pillemer, chief executive officer at Pengana Capital.
“If you’re using it as a category to throw in all orphan investment opportunities – everything that doesn’t fit anywhere else – then you just end up with a collection of strategies where there’s no logic for them to be together,” Mr Pillemer told InvestorDaily.
What the alternatives category describes is not what investors are seeking, Mr Pillemer suggested, and in order for investments to be “bucketed” together they should be designed to deliver similar investment outcomes.
“It is pretty obvious that many of the diverse range of investments that are included in the alternatives category are unlikely to deliver similar outcomes,” he said.
Mr Pillemer said what most investors want from the alternatives category is a return profile that is uncorrelated or lowly correlated with equities, meaning the alternatives category should be replaced by an uncorrelated category.
Some of the investments currently in the alternatives category wouldn’t necessarily be uncorrelated and can slot into other pre-existing categories, according to Mr Pillemer.
“It’s all based upon the outcomes they’re designed to generate – are they consistent, do they have a similar type of character?” Mr Pillemer said.
“If you’re much more specific and if you’re looking to create a category that is uncorrelated with equity markets and you call it an uncorrelated category, then you won’t be able to throw in things that really don’t fit.”
Mr Pillemer added allocators should not confuse lack of mark to market pricing with lack of correlation.
“Just because an investment is not priced does not mean that its value does not change with changes in markets,” he said.
