BlackRock Global Liquid Alternatives Fund (Aust): https://www.blackrock.com/au/products/332726/
This product is likely to be appropriate for a consumer:
• seeking capital growth
• using the product for a minor allocation of their portfolio or less
• with a minimum investment timeframe of 5 years
• with a medium to high risk/return profile, and
• who is unlikely to need access to their capital for up to two weeks from a request
This product is for advised consumers only.
Research shows that local advisers have just 4% of assets invested in alternatives across client portfolios, compared to around 25% globally1. While the alternatives space can often be confusing to navigate, BlackRock’s Head of Investment Strategy for Australia, Katie Petering, unpacks what advisers should look for in a strategy that can add value in today’s volatile markets.
Key takeaways
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As markets turn volatile amid simmering geopolitical tensions and fears of a US economic downturn, advisers are increasingly interested in finding ways to diversify portfolios by utilising alternatives – which are predicted to grow to US$29 trillion globally by 2028.2
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We believe that liquid alternatives such as hedge funds have a strong role to play in client portfolios today by adding stability. High quality hedge funds have historically delivered strong risk-adjusted returns through the cycle and positive performance in challenging market environments.3
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But picking ‘winning’ hedge fund strategies and managers on a consistent basis can be difficult. We see investors favouring a diversified exposure to hedge funds, via multi strategy funds, to overcome these challenges.
A fractured market
Since news of US reciprocal tariffs shocked markets, the S&P 500 Index has declined by more than 10%, causing the fastest wipeout of US equity market value in history4 and capping off an almost 20% fall from the record highs we saw in February5. While economic data in the US remains resilient, the much higher than expected average tariff levels flagged in the US administration’s announcements have considerably raised the risk of a global recession.
This is yet another example of the more volatile investing environment we have seen in the years since the pandemic, as elevated macro uncertainty continues to drive uncomfortable swings in performance across equities and bonds (see chart below). Structurally higher inflation and rising government debt levels are also breaking down the traditional inverse relationship between bonds and equities, as seen in 2022 when both asset classes declined by more than 10%.
Global equities and bond returns, 2000-2024
Source: BlackRock as of 31 December 2024. Global equities represented by the MSCI All Country World Index (unhedged) in AUD. Bonds represented by the Bloomberg Global Aggregate Index (hedged) in AUD. Simulated past performance is not a reliable indicator of future performance.
Similarly, as investors digest the inflationary impact of the tariffs that have driven the current market downturn, we’ve seen the 10-year US Treasury yield climb to more than 4%6, suggesting the Federal Reserve may be limited in its ability to support the US economy through interest rate cuts.
As returns from traditional asset classes have become more uncertain, we see increasing interest from the wealth market for new forms of portfolio diversification, providing advisers with a broader toolkit to pull from in times of market turbulence. The results of BlackRock’s Q1 adviser pulse survey reveal that as market conditions have deteriorated over the first few months of the year, more than 20% of local advisers are interested in increasing allocations to alternatives to reduce the impact of volatility in their portfolio.
Similarly, a survey of around 600 BlackRock clients across Asia Pacific the day of the tariff announcements indicated around 30% were interested in diversifying out of equities.
Sourcing ballast within alternatives
Investors typically allocate to alternatives because of their diversifying nature, high alpha potential and strong risk-adjusted returns. But when we talk about alternatives, there is a large investment universe to consider, spanning private equity, private credit, real estate, infrastructure and hedge funds.
Given the volatile macro backdrop, hedge fund strategies are becoming more popular as they tend to be less affected by market fluctuations. But the hedge fund universe is vast and complex, with over 10,000 options available in various strategies like equity long-short, global macro, multi-strategy, systematic, credit, and event-driven.
There is a wide range of returns across different hedge fund strategies over time, as shown in the chart below. Unsurprisingly, many wealth managers find it challenging to reliably choose a strategy that will consistently outperform, and to identify top-performing fund managers within those strategy categories.
Hedge fund strategy returns, 2014-2024
Source: HFRI, as of 31 December 2024. Returns are shown gross of fees and expenses.
These challenges may go some way in explaining why allocations to hedge funds among Australian investors are relatively low. According to Bloomberg figures, the average allocation to hedge funds across super assets (growth options) was just 0.6%.7
With a noticeable portion of global investor flows going into diversifying strategies such as multi-strategy hedge funds in recent years, it seems that investors are increasingly demanding a broad-based exposure to hedge funds. It also suggests that investors increasingly expect managers to help them navigate this complex ecosystem by providing both strategy and manager selection.
Selecting hedge fund strategies – Three key considerations
- Just like building a typical 60-40 portfolio of equities and bonds, when it comes to a hedge fund portfolio, diversification is key. We focus on strategies that have a low correlation with traditional asset classes such as equity and fixed income. When combined with traditional asset class exposures as part of a wider portfolio, this can help to enhance a portfolio’s risk-adjusted returns and reduce the size of drawdowns.
- An effective hedge fund strategy should deliver attractive levels of alpha. In a hedge fund setting, we measure alpha as a fund’s excess return over the returns from cash, rather than simply aiming to generate positive absolute returns. We believe that the fee paid for such strategies should be commensurate with their alpha potential.
- Understanding the quality of a hedge fund strategy is also a critical consideration. High-quality strategies usually produce better risk-adjusted returns, which can be measured by a fund's Sharpe ratio. As we can see below using BlackRock’s Global Liquid Alternatives Fund (‘GLAF’), these strategies can meaningfully outperform other diversifying assets across investor portfolios.
Liquid alternatives vs common fixed income indices
Source: BlackRock. Global Bonds: Bloomberg Barclays Global Agg (AUD hedged); Global Credit: Bloomberg Barclays Global Agg Corporate (AUD hedged); Data is for the period: January 2017 to 31 December 2024.
In the new investing regime of increased volatility and higher interest rates, we believe the strong risk-adjusted performance of hedge funds is set to continue, adding valuable stabilising effects to investor portfolios. With the asset class now available in a daily liquid format that can be easily integrated into model portfolios, hedge funds represent a compelling option for advisers to tap into a diversified source of returns for clients.
Author
Katie Petering
Head of Investment Strategy for Australia
