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  • Christian Armbruester

Something Else

Why alternatives to equites and bonds are hard to find.

Nothing beats the S&P 500 at a time when central banks have pumped trillions and trillions of Dollars, Euros and Yen into the markets. Of course, the music will stop someday and it is the reason we are all looking for alternatives. Particularly when the bond markets no longer function as a means of generating fixed income. Real rates on ten-year German Bunds are negative 4% at the moment, which doesn’t exactly offer an exciting investment proposition.

So, what are the alternatives to stocks and bonds? There is the illiquid stuff. Private equity or direct lending, and all sorts of other structured products that let us capture the premium from tying up our money for the long term. On the whole, these investments seem to have performed very well during the crisis, but then again, we won’t really know until we get our cash back. In the meantime, anything can happen, and tail risk takes on a whole new meaning when you just don’t know when (or if) you will ever be able to exit positions you opened ten or twenty years ago.

On the other extreme are the so called “liquid alternatives” and here you have to beware of the proverbial free lunch. Listed infrastructure funds or other theme based exchange traded offerings provide scant protection in times of market adversity often falling much more than equities. The same applies to that other supposed holy grail, “risk premia”, which is so highly correlated to the markets that you are better off just buying your friendly neighbourhood index tracker. There is Gold, but that’s more of a currency play and before you say it can protect against inflation, the evidence would suggest otherwise.

Which brings us to hedge funds, and the term itself conjures up so many preconceptions it makes it difficult to have an honest debate. First of all, the main difference to any other fund people seem to have no problem piling into, is that you can go short. Nothing wrong with that, because you know, things can also go down and betting on two directions of travel seems to be the whole point of doing something other than just buying stocks and hoping for the best.

There is a large disparity from one strategy to another, not only because of the types of instruments used, but also the risk any particular manager chooses to deploy. Some have daily dealing, others have monthly, but once you move beyond quarterly, you better make sure you get what you pay for. Like anything, there are good apples and ones that are rotten to the core. It is up to the investor to decide which risks they like or what strategies to avoid, and there is a huge variety of funds to choose from. Unequivocally, we may dislike the fees and the arrogance of the managers even less, but as far as alternatives are concerned, hedge funds seem to be the only game in town.


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