Investors seek out alternative investment strategies to hedge against Trump

There’s a fresh shine on alternative assets as investors seek a haven from volatile listed markets. But warning signals are flashing here, too.

Investors have been throwing themselves into private credit, chasing promises of steady income and capital growth.

Volatility in listed equity markets is driving fresh demand for alternative assets as investors try to shield themselves from the potential for disruption sparked by US President Donald Trump.

The market has settled since the so-called Liberation Day in April and is up around 4 per cent this year. But it’s the volatility making investors nervous.

It may be calm now as markets embrace the TACO (Trump Always Chickens Out) trade, but who knows how long that will last?

The lure of alternatives, which include a wide range of assets such as private credit, private equity, infrastructure, crypto and real estate, is not just the returns on offer but also the diversification benefits.

In theory, they behave differently to listed equities and provide a degree of comfort when sharemarkets suffer violent ructions.

The red-hot private credit space is an obvious choice for those looking for a defensive element to a portfolio far removed from the ups and downs of public markets. And investors have been throwing themselves into this asset class, chasing promises of steady income and capital growth.

“There’s been an explosion of new private credit funds available to investors in the past few years,” GFM Wealth Advisory managing partner and senior financial planner Paul Nicol says. “It’s now a very crowded market and extra care is needed for those preparing to dip a toe in.”

The rush to private credit has been so relentless the regulator is now probing the wider private markets sector as it seeks to get a better handle on what happens under the hood of this broadly opaque market that boasts $150bn assets in Australia alone.

“We have a degree of caution on this part of the market at the moment because it’s so crowded. We largely like to be in managed private credit portfolios that have very diversified loan books. We prefer not to be in single loans,” Nicol says.

Metrics Credit Partners is one manager he puts client money into.

How much should you allocate to alternatives?

But how much of a portfolio should be in alternatives and how much wealth should you have before stepping into these asset classes?

For Nicol, investors should have at least $500,000 at hand to get the proper diversification benefits of alternatives. Anyone who doesn’t meet this threshold can probably do well enough just leaving it up to the major super funds to do the hard yards for them, he says.

He says for an average growth-focused investor, a 10 to 20 per cent allocation to alternatives is appropriate. This is across a variety of options, namely private credit, private equity, infrastructure and real estate.

The returns an investor can expect from each option vary depending on the risk.

Private credit, for example, is direct lending to a business. It comes with a steady income component and it’s not seen as high risk, though that may be changing as more and more funds pop up to take advantage of strong investor appetite.

Returns may be in the mid to high single digits.

Private equity, on the other hand, is riskier and investors will therefore be looking for higher returns of at least 10 per cent and often much more. But private equity has been in the doldrums the past few years, with returns not nearly as attractive right now.

Even as the regulator probes private markets and risks look to be rising in some segments, a new survey from investment manager Fidante, which is part of Challenger Group, reveals some financial advisers are seeking to add to alternative assets for clients.

It found one in three advisers is looking to increase client allocation to infrastructure, while one in five plans to add to private equity and private credit.

The global backdrop plays a part here, according to Fidante Affiliates general manager Evan Reedman.

“It’s likely global macroeconomic and geopolitical tensions will continue, and for investors that means navigating a period of ongoing uncertainty and volatility,” he says.

“Advisers have been quick to look further afield for pockets of opportunities, such as emerging markets, small caps and private markets, that can provide both diversification and alpha to a client’s portfolio.”

Super tax the latest challenge

Not everyone is aboard the private markets train. The latest challenge is the government’s looming new tax on higher superannuation balances which, for some, is prompting a rethink against locking up retirement savings into illiquid assets.

Aspire Retire co-founder and financial adviser Olivia Maragna says many of her clients’ portfolios are already defensively positioned and, while they’re staying invested in markets, she’s typically advising a staggered approach when adding to holdings right now because of the uncertainty at home and abroad.

She’s not advising against alternatives but sees benefits in choosing listed options to get exposure to these asset classes, such as infrastructure or private credit ETFs.

“With the $3m super rule, if that comes in no one will want to get locked into something that they can’t get out of if they’ve then got to go and change their strategy.

“With listed holdings, there’s reporting requirements, there’s all those things that you’ve got security over. As things start to get a bit uncertain, the focus tends to come back to ‘what is it that I’m invested in? How do I own it? How do I get my money out if I want it?’ Liquidity is important to investors at that time.”

Originally published as Investors seek out alternative investment strategies to hedge against Trump