5 MINUTE READ

A look back

All of this helped you gain a strong understanding of the foundational principles underpinning alternative products.

Number 1
Module 1
Your journey began by mastering the alternatives universe.
Number 2
Module 2
You discovered the building blocks of alternative investing.
Number 3
Module 3
You learned about real estate and infrastructure.
Number 4
Module 4
You conquered the intersection of alternatives and ESG.

Now it’s time to piece the blocks together and see how these sub-asset classes combine to solve outcomes within a portfolio context.

Before we do so, let’s refresh on the three main reasons investors should consider alternatives for their portfolio in today’s landscape.

Why alternatives now?

Number 1
Private markets access
Private markets have grown substantially over the past few decades while the public markets universe has shrunk - providing increased access to investment opportunities.
Number 2
60/40 portfolio
A recent BlackRock study1 indicated the 60/40 approach will not only fall short of the moderate returns of the past, but can increase investment risk.
Number 3
Alternatives investments democratization
BlackRock believes that the allocation to private markets in wealth portfolios should increase from 5% to 20% over the next several years1.

In other words, investors – like you – may need to consider new strategies.


Introducing alternatives to a portfolio with a challenge to solve

Let’s put it into practice. The below scenario demonstrates increasing income through an illiquid portfolio by introducing alternative investment solutions.

Fun fact

A BlackRock Capital Assumptions Analysis states that from the 60/40 portfolio (Public markets: 60% equity, 40% bonds) we can currently expect a 5% return1.

Portfolio allocation chart

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The alternative solution

Take a full-portfolio approach by introducing private markets exposures.

By diversifying a traditional 60/40 portfolio with private markets exposures that are aligned to the desired investment outcomes, the investor was able to increase their expected returns and mitigate risk by diversifying assets and moving beyond traditional investment products like stocks and bonds.

By incorporating a range of income-oriented private assets such as brownfield infrastructure equity, mezzanine, corporate debt, and three types of income-oriented real estate strategies, the risk/return profile increases from 0.44 to 0.66.

Portfolio allocation return chart

Source: Forecasts are not a reliable indicator of future performance. Risk calculated using BlackRock’s risk management platform, Aladdin. Indicated systematic risk exposures and the market based risk factor changes and are meant to predict the performance of illiquid investments if they were traded in the public market as of 30/9/2021, from the trailing 72 months of data. It does not represent accounting volatility based on quarter over quarter valuation marks. BlackRock expected market return information is based on BlackRock’s 5 year capital market assumptions as of September 2021, which are subject to change. Private Market expected returns are gross of fees. Capital Market Assumptions are sourced from BlackRock Investment Institute. There is no guarantee that the capital market assumptions will be achieved, and actual risk and returns could be significantly higher or lower than shown. Hypothetical portfolios are for illustrative discussion purposes only and no representation is being made that any account, product or strategy will or is likely to achieve results similar to those shown. Purpose is only to demonstrate the potential benefits of adding private markets to a 60/40 portfolio.

Guru glossary: Risk return

The risk/reward ratio marks the prospective reward an investor can earn for every dollar they risk on an investment. Many investors use risk/reward ratios to compare the expected returns of an investment with the amount of risk they must undertake to earn these returns.
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Quotation start

The current reality requires us to rethink the way we invest to achieve our investment goals. As we face market headwinds, such as increased volatility, inflationary pressures, and overall uncertainty brought on by the COVID-19 pandemic, incorporating alternative investment strategies can contribute to creating more resilient portfolios today and in the future. BlackRock offers a variety of alternatives solutions for investor profiles, strategy and purpose.

Quotation end
Roque Calleja, Head of Alternatives for Latin America Roque Calleja Head of Alternatives for Latin America
Test your knowledge
Q. Which of these statements are NOT a reason to consider Alternatives?

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Why not try one more time?

The correct answer is
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This concludes Module 5.

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This concludes Module 5.



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