Alternatives: In search of stable rents

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We focus on senior secured direct lending strategies with short durations that offer stable and attractive returns, protection and liquidity.

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In an environment in which it is difficult to obtain high returns without assuming extremely high risks, alternative investments can be a good ally for investors. Alternative investments can be defined as those that do not meet the characteristics of traditional investments, mainly fixed-income, variable-income and monetary assets. Alternative investments can be very diverse, but as a rule they share certain peculiarities that differentiate them from conventional ones, both in the types of assets they can include and, in the strategy, implemented in the investment process.

Alternative investments have shown low correlations with traditional markets, a factor that is of great help in the process of optimal portfolio diversification, allowing the investor both to reduce global risk without sacrificing return and to increase the latter while maintaining the same level of risk. In addition, alternatives provide access not only to public markets but also to private markets, have more specialized managers, and seek a greater contribution of alpha than of beta in the origin of the performance of the portfolios. Historically, the returns on alternative investments have been on average higher than on traditional ones. This has several explanations. Typically, alternative managers invest in less liquid assets in less efficient markets, where it is easier to take advantage of market inefficiencies.

The main examples of alternative investments are hedge funds, private equity, private debt, and real assets such as real estate, infrastructure, and commodities. The year 2018 showed us that more liquid strategies, such as hedge funds and commodities, tend to have a higher volatility than traditional asset classes. They do not always help to defend investors against falls in traditional assets. For example, most hedge funds had negative returns in 2018, including strategies that theoretically should have little correlation with equities, such as market-neutral or managed futures. This can be explained by abrupt and unexpected changes in the trends of indices, sectors, and individual actions caused by political or economic events or the irrational behavior and psychology of investors. Raw materials also tend to be very volatile, including gold, which fell 1.9% in 2018.

Consequently, we favor private markets, where interesting returns are found that do not depend on the current economic situation and, more importantly, tend to be much more stable than traditional assets. Many areas of private markets have not benefited from the monetary stimulus of recent years. The returns remain relatively high because access to capital remains limited for many smaller companies. In particular, there is a very strong trend of large banks no longer lending money to small and medium enterprises as a result of new regulations on their capital reserves after the great financial crisis of 2008. This trend created an opportunity for the private sector to lend money in very safe areas with strong guarantees, generating attractive returns in the range of 5–15%. These returns do not depend on the macroeconomic environment and traditional financial markets. Extremely low default rates and short duration imply that there are only minor fluctuations, with annual volatilities below 2%. However, the alternative segment obviously requires a deep due diligence and the advice of experts in the field.