Fund buyers turn to alternatives to protect portfolios

In the face of increasing market volatility, professional investors are taking some risk off the table.

More than three-quarters of UK fund buyers are turning to alternative investments in the face of increasing market volatility and ongoing Covid-19 uncertainty.

CoreData Research surveyed 200 professional fund buyers from firms including wealth managers, private banks and insurers in the UK, North America, Europe and Asia, asking them about their investment positioning in November and December 2020.

The research found that 77% of UK fund selectors are using alternatives to manage risk, significantly higher than the global average of 57%.

Almost all respondents from the UK (96% versus 79% globally) said that alternatives to shares and bonds are becoming increasingly important to achieve diversification.

Alternative investments include infrastructure, commodities and private equity, among others.

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Short-term opportunities

As well as looking to protect and diversify portfolios, professional investors are also trying to capitalise on current market conditions. About two-thirds of global respondents, and the same proportion in the UK, are using tactical asset allocation strategies to exploit volatility and short-term market opportunities.

A further two-thirds are hunting for opportunities in risk assets such as equities, emerging markets and commodities. Half of fund buyers worldwide (52% versus 54% in the UK) are investing in value funds in the hope they will benefit from an economic recovery. At the sector level, pandemic beneficiaries including tech, healthcare and e-commerce continue to see growing allocations.

Active fund conviction

Conviction in active funds is stronger among UK investors, with 65% saying they were mainly using active funds to give protection from volatility, above the global average of 47%. More than half (54%) of UK respondents said they expect to see market volatility rising over the next 12 months, although this was below the global average of 60%.

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Top of the list of worries for investors both in the UK and globally right now is a new spike in Covid cases, or a new wave of lockdowns. Other concerns were asset bubbles forming in sectors such as tech, or the withdrawal of monetary and fiscal stimulus.

“With markets expected to remain choppy in 2021, fund buyers are looking to active strategies and alternatives to reduce volatility and manage risk,” says Andrew Inwood, founder and principal of CoreData. “We will likely see a continued shift to private markets and alternatives as investors seek out uncorrelated sources of return to diversify portfolios and generate alpha.”