CIO Roundtable: Liquid Alternatives Named a Top 10 Investment Theme for 2020
Volatility, high valuations, and recession risk increase the allure of liquid alternatives in 2020.
The leaders of investment platforms at the $339 billion investment manager Neuberger Berman discussed the investment environment through 2019, and the key trends they expect in 2020. Liquid alternative investments made it to the list of the top 10 investment themes in the coming year.
Erik Knutzen, Chief Investment Officer-Multi-asset Class, and Anthony D Tutrone, Global Head of Alternatives, weighed in on liquid alternatives.
Volatility could mean vast opportunity for liquid alternatives in 2020
A well-diversified set of liquid alternative strategies could help smooth a bumpy ride in 2020.
Both Knutzen and Tutrone anticipate volatility in 2020, even “prolonged episodes” thereof, stemming from already high valuations and recession fears. However, though these fears did not materialize in 2019, they are becoming a risk for 2021.
“Portfolios will require some ballast to help mitigate the volatility, and investment-grade fixed-income remains too low-yielding to provide it,” said Knutzen. “This is where a well-diversified set of liquid alternative strategies can perform a key function.”
Are liquid alternatives the seat belt?
The trick is to shelter from the gyrations in the traditional asset markets, yet keep intact a semblance of liquidity. Liquid alternative strategies suggested by Knutzen for 2020 include taming an equity exposure with collateralized put option writing. Another strategy is to take shorter-term trades, long or short, to avoid market choppiness. A third is to adopt a ‘relative valuation’ strategy to exploit the differences in prices between assets or asset classes. A fourth is using uncorrelated strategies such as alternative risk premia.
Private markets as a foil to volatility
Tutrone: “When it comes to volatility, private markets investing helps because it simply forces you to think more long-term about value creation.”
The long-term commitment inherent in private investing is therefore immune to the emotional stress from swings in market sentiment.
Innovations in private markets seen in 2019 are likely to carry forward to 2020. Examples are increasing recourse to private debt, re-insurance risks available for underwriting via private markets, direct/platform lending to small business, and mortgages.
Illiquidity in private funds and assets is reducing as their secondary markets develop, and this trend could reinforce in 2020.
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