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How might alternatives play a bigger role in investors’ portfolios?

21 October 2020 BlackRock

Due in part to a steady decline in the number of listed stocks, industry insiders predict that finding returns in traditional markets will become increasingly difficult. As a result, many investors are turning to alternatives to add diversification and greater return potential to their traditional 60/40 (equity/bonds) portfolios. But what else could drive this growth in the years ahead?

Technology
Many experts expect technology to drive more investors towards alternatives. Technology has a role to play in developing more sophisticated products, increasing transparency and educating investors on the role alternatives can play in their portfolios.

Growth across the alternatives spectrum
We may see significant growth in illiquid private markets, these are markets where assets are not traded on an index. Such securities can take longer to buy and sell, hence being defined as illiquid – as well as more-liquid alternative strategies that invest in listed equities and bonds. Private markets, such as infrastructure and privately listed bonds, are increasingly seen as sources of income, capital growth and diversification for every kind of investor, from wealth managers to retail customers.

Changing regulations
One of the key mechanisms driving this growth is the European Long-Term Investment Fund (ELTIF), which makes it easier for a wide range of investors to invest in infrastructure, private businesses and education facilities, among other initiatives. Insiders feel that ELTIFs could have a similar impact on private markets to the impact the Undertakings for the Collective Investment in Transferable Securities’ (UCITS) had on the hedge fund industry (An investment fund that uses alternative strategies to make a return), which helped more investors gain access to alternative strategies a decade ago.

 

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