Alternative investments can provide sources of returns that are not correlated with traditional assets, such as equities and bonds. They are particularly useful components in a diversified portfolio because they can counterbalance a downturn to some degree – when markets are falling, alternative strategies should help to offset some of the losses.

Some alternative investments can also help to boost portfolio performance over the long term. For instance, private equity firms tend to have access to information that can give them an investment edge. They can provide financial support to companies and help them renegotiate loan terms and debt obligations. As a result, private equity-backed companies are generally more resilient during a downturn.

Hedge fund managers have access to a larger toolbox than traditional asset managers, such as leverage and derivatives, which gives them more flexibility to manoeuvre during challenging periods for financial markets.

Alternatives also include economically decorrelated assets with strong sustainable characteristics. For example microfinance funds are typically exposed to localized emerging and frontier economies rather than the broad economic cycle, while agricultural finance funds are impacted more by the weather than financial markets.

When the market environment is volatile and the outlook uncertain, alternative investments can play an important role in portfolios. As well as offering diversified sources of returns, they can boost long-term performance.

With $2.3 trillion in capital to invest across private markets (and more than $700 billion in buyout capital alone), managers are looking to take advantage of falling asset prices. As happened during the 2008 Global Financial Crisis, the first wave of opportunities will probably come in the form of distressed assets.

The reduced availability of high yield debt and syndicated loans creates the opportunity for private equity firms to buy companies at bargain prices. In addition, any forced liquidations of investment portfolios allow secondary funds to purchase quality assets at discounted prices. Key sectors are likely to be those affected the most by the coronavirus crisis, including tourism, aviation, hospitality, restaurants, oil and industrials with severe supply-chain issues.

When conditions in financial markets become stressed, the prices of some securities no longer accurately reflect the value of the assets they represent. These dislocations create opportunities for private equity funds. The best vintages have often coincided with dislocations in public equity markets, such as in 2001 following the dotcom crash and in 2008 after the US subprime mortgage crisis.

Impact investing is an exciting and rapidly growing movement driven by investors who are determined to improve our society and environment in measurable ways, as well as generate attractive financial returns. It is taking place all over the world.

When the going gets tough in the global economy and markets, investors tend to turn to gold as a safe haven. We expect prices are likely to remain higher as central banks implement large doses of monetary policy because gold is widely viewed as a hedge against currency debasement. Rising debt levels and low interest rates could continue to offer their support too.

Gold is more than a store of value in times of uncertainty – it also provides a hedge against inflation. We don’t expect prices throughout the economy to rise substantially any time soon. However, markets could be underestimating the inflationary pressures that will come when the lockdown lifts and the global economy reopens for business.

Lastly, gold can provide a genuine source of diversification in portfolios because of its low correlation with other financial assets. With yields on government bonds at unattractively low levels – and even negative in some instances – gold offers potentially more attractive returns as an alternative safe haven.

From a sustainable investing perspective, gold presents some challenges. Mining often has a negative impact on the environment and local communities, and has long been a dangerous profession for the people who go to work underground. But the investment landscape is changing. Responsible investors are increasingly turning to physical gold that has been recycled or gold that has been mined more recently, when industry employee and environmental standards have improved.

A number of high-profile scandals over the past few years highlight the importance of conducting proper due diligence on funds before investing. Investors must ensure managers have robust operational and risk management systems in place, as well as solid counterparty and financing arrangements so they can effectively manage periods of disruption, such as the Covid-19 crisis.

The increasing legal and compliance costs associated with meeting regulations give large established firms an advantage. To gain access to these managers, private clients can use feeder funds or alternatives portfolios provided by wealth managers.

Within impact investing, the arrival of large mainstream managers with strong track records and extensive resources has improved the rigour of investment analysis. This trend has been very beneficial for fund selection teams seeking both impact and competitive returns.

The huge dispersion of returns in the alternatives sector makes manager selection essential – the best funds outperform equity and bond markets, but the worst significantly underperform. 

Investing in well-managed companies that have a positive impact on our world makes good financial sense. For example, those that use energy efficiently and invest in training their employees could outperform their competitors and return more value to investors. Over the long term, they may be better prepared to meet future strategic challenges and take advantage of new business opportunities.

Demand from investors to consider environmental, social and governance factors has encouraged the growth of dedicated impact funds. Since 2017, six of the largest private equity managers have raised or announced plans to raise about $9 billion in impact funds. They know that large companies are willing to pay more to acquire sustainable brands. A study by management consultants McKinsey found that companies with a positive ESG record attract a 10% premium over those with a negative one.