Making the most of alternative investments

In an economic landscape characterized by shifting interest rate environments, growth uncertainty, and increased volatility, achieving consistent returns may be more challenging than in previous economic regimes. At the same time, many institutions are facing increased expenses as a result of higher inflation leading to greater reliance on investments.

Today’s economic reality is a far cry from the pre-pandemic era of low interest rates and low inflation. The new regime includes greater dispersion in asset performance, which presents new opportunities for foundations, family offices and endowments to capture above-benchmark returns through an active approach.

Long-term investors may be able to achieve more resilient outcomes by allocating to alternative investments alongside traditional assets. Alternative investments can offer enhanced or differentiated return opportunities and attractive diversification benefits. Some may also help investors achieve specific objectives such as hedging against inflation.

An underused opportunity

Despite clear benefits, alternatives are still underused by investors. In fact, nearly four in ten institutional investors don’t invest in them at all, citing liquidity concerns and complexity as top reasons they avoid the asset class.¹ What’s more, investors are concerned about taking on the additional cost of management fees that can be more expensive than those found in publicly traded assets, such as mutual funds or exchange-traded funds.

The alternatives space is broad, characterized by a range of costs, liquidity profiles, and opportunities to generate returns. Understanding where a particular alternative investment may fit in a portfolio can present immense challenges. This requires significant resources and specialized knowledge to navigate the alternative landscape, especially one marked by meaningful dispersion. Additionally, liquidity may be difficult for organizations to manage appropriately to meet shifting short-term needs.

Even investors that do hold some alternatives may struggle to find appropriate options, remain diversified, and access top-tier mangers to oversee investments with affordable fees.

Yet, avoiding the asset class entirely can lead investors to miss out on this opportunity to diversify their portfolios and potentially generate higher risk adjusted returns.

Leveraging expertise in alternatives

Investors looking to unlock the potential benefits of alternative assets have the option of engaging an outsourced chief investment officer (OCIO) to streamline overall complexity and improve portfolio outcomes. OCIOs are third parties to whom organizations can outsource a range of investment activities, including managing alternatives.

An OCIO can help reduce investors’ operational burdens by tracking capital commitments, capital calls and distributions, and managing overall liquidity while providing visibility and oversight of investments. Engaging an OCIO allows organizations to leverage a dedicated team focused solely on investing. OCIOs can also make investment decisions in real time, helping organizations take advantage of short-term investment opportunities. For example, in an equity drawdown, an alternatives sleeve may become a bigger portion of a portfolio, requiring managers to reallocate public assets. The diligence and oversight provided by an OCIO can help ensure investors continue to meet their portfolio goals amid such changes. And with a dedicated investment team in place, this frees up time for organizations to focus on addressing other strategic priorities.

To capture the benefits of alternatives, investors need access to high quality opportunities that meet their unique needs. BlackRock’s OCIO team, in collaboration with its Multi-Alternatives and Manager Research teams, leverage extensive private markets capabilities and deep institutional expertise to integrate alternatives through a whole portfolio lens, striving to ensure that alternative allocations are appropriate to a particular investor’s long-term strategies and needs. BlackRock’s network can also connect investors with top alternatives managers who provide attractive fees that institutions may have trouble accessing on their own.

Not all alternatives are illiquid

Investors with concerns or restrictions around liquidity may consider the role liquid alternatives and hedge funds can play in a well-diversified portfolio. These options could include strategies managed by the BlackRock's Global Tactical Asset Allocation (GTAA) team, which seek to deliver returns with low correlations to traditional assets by taking long and short positions in global equities, bonds, and currencies. We also have expertise in building portfolios that combine multiple hedge funds from BlackRock or third parties to meet client objectives.

Contact our team today to learn how a partner like BlackRock can help you pursue your goals.