Alternative opportunities quarterly update

Executive summary

Portfolio risk: We remain neutral on how we’re allocating risk within our alternatives portfolio, primarily due to the combined impact of high equity valuations with an elevated cost of financing. In general, we’re more bullish on defensive alternatives, favoring private debt, real assets, and hedged strategies versus private equity. 

Private credit: 

• As market volatility subsides, we’re watching for signs of renewed M&A activity. In the meantime, patient credit investors may continue to benefit from a favorable higher-for-longer rate environment.
• We are overweight real estate credit given high levels of current income and a recovering real estate equity market.

Private equity: We remain underweight private equity, especially traditional buyout strategies which generally require leverage to generate returns. The combined impact of high equity valuations with an elevated cost of financing may be a significant headwind.

Real assets: We’re slightly increasing our exposure to real estate as our conviction for the outlook that valuations have bottomed is beginning to firm. While we are optimistic amid easing financial conditions, we remain vigilant given tight cap rates and a murky outlook from policymakers. 

Hedge funds: We believe hedge funds with lower betas to market risk may be a valuable alternative within a portfolio. Spreads within event-driven strategies remain high due to the limited capital markets activity from mergers and acquisitions as private equity remains sidelined.

Investment risks

The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations), and investors may not get back the full amount invested.

Alternative strategies may include investments in private equity, private credit, private real estate and infrastructure, which may involve additional risks such as lack of liquidity and concentrated ownership. These types of investments may result in greater fluctuation in the value of a portfolio. Private Market investments are exposed to risk, which is the risk that a counterpart is unable to deal with counterparty obligations. Changes in interest rates, rental yields and general economic conditions may result in fluctuations in the value of any underlying strategies. These types of strategies may carry a significant risk of capital loss and other market risks.