Alternative assets - to invest or not

Those who follow our Charity Benchmark Report, which includes data on how typical charity Mixed Funds are invested, will have noted that the typical charity now has around 5% in 'other' assets, which we can safely interpret as hedge funds. This is in addition to the 6.5% invested in commerical property. It is noticeable that more recent additions to the range of investment funds available exclusively to charities, tend to have larger allocations to such 'alternative assets' than their long-standing competitors. Whilst it's possible to be content that lack of exposure to these assets over the last few years has been no great loss, my view is that one can not afford to discount their possible inclusion outright in any one charity's portfolio. That said, to date, our clients have tended to avoid investment in alternatives which, as you would imagine, has been due to some extent to our lack of enthusiasm for their inclusion. This is partly due to the nature of the assets we manage for many of our charity clients. Since invested capital is often permanently endowed i.e., the capital must remain invested with only the income it generates available to be spent by the charity, the day-to-day fluctuations in the capital value of the portfolio have no immediate impact on the return available. Of course we understand the theoretical benefits of adding uncorrelated assets to an overall portfolio mix but recent history has shown that alternative assets have been much more correlated to traditional assets than some managers expected! Since lack of volatility in capital value (and no income to speak of) is a feature of most hedge fund strategies, they tend not  to be the best theoretical fit for many of our clients. There is no getting away from the fact that many alternative strategies simply rely on the belief that very clever people will continue to do very clever things consistently into the future. Some undoubtedly will, but some will not. At the level of the final investor, the problem as ever lies in picking the good from the bad and repeating the process ad infinitum. This week I've been visting hedge fund-of-fund managers and managers of commercial property funds for charities, following a desk-top exercise to isolate those worthy of a more in-depth face-to-face chat. Each manager completed a detailed, proprietary questionnaire in advance. Thanks go to the one short-listed organisation who declined to complete our questionnaire and thereby made our job a little easier! Whilst this is an expensive exercise in terms of time, we feel that it's worth the effort. Clearly we need to know exactly why we are not investing in something as much a why we are. The initial findings are very interesting and we'll be sharing them with clients over coming months. John

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