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Matthew Botein, Head of BlackRock Alternative Investors (BAI), BlackRock

Blackrock espouses virtues of alternative investments

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Blackrock Alternative Investors espoused the virtues of alternative investments and the diversifying role they can play in institutional client portfolios in a May 25 presentation entitled: The role of alternatives in institutional client portfolios.

The three speakers included: Matthew Botein (pictured), MD and head of Blackrock Alternative Investors; Marcus Sperber, who heads up Blackrock’s international real estate business, and Ken Kroner, head of Global Market Strategies Group (GMSG).

Botein began by presenting the current market challenges being faced by investors and how alternatives can address them. With ever-declining bond yields and reflated asset prices, the opportunities that existed for pension funds a few years ago are diminishing said Botein. Inflation is a real concern, and the flood of cheap money through quantitative easing has seen significant increases in commodity prices.

“Institutional investors want some downside protection against rising prices as well as attractive returns. There’s a continued desire amongst UK pensions to de-risk,” said Botein. Investors better understand the risk in their bond and equity portfolios and increasingly looking at alternatives to hedge against inflation.

Botein said that alternatives were well positioned to cope with these inflationary and low-yield challenges and believes infrastructure is poised for significant growth. “Across all categories (from private equity and hedge funds through to commodities) we’re seeing clients in the midst of increasing their allocations across the board.” An aggregate increase of 59% is expected this year versus 2009.
“If we take a portfolio of equities and bonds and add in real estate, commodities, hedge funds, the portfolio, whilst enhancing returns, begins to exhibit lower volatility and correlation,” explained Botein.

Speaking on real estate, Sperber said that pre-crisis, when investors were enjoying returns of nearly 20% p.a., the biggest danger was that they didn’t fully understand the underlying risks of opportunistic strategies. “We need a back to basics approach and retreat into ‘core assets’,” said Sperber, advising that investors need to allocate sensibly and understand exactly what it is their investment managers are doing.

Sperber said that the investment market was much more focused on ‘core assets’, using the London Gherkin as an example, rather than some windswept suburban shopping centre. Indeed, some 65% of investors now favour this investment style compared to less than 10% in 2008.

He added that it was necessary to exploit market inefficiencies, referring to three UK/European strategies: assets with potential to add value, non-traditional sector investment and real estate mezzanine debt.

On the first strategy Sperber said: “London has emerged as a global retailing hub. We bought a mixed-use property within 200 metres of the Apple store in Covent Garden. Assets like this have potential to add value.”
Sperber said that what investors need to do is be aware of bubbles, focus on fundamentals and seek out value.

Ken Kroner concluded the presentation by discussing global macro as a suitable hedge fund strategy for institutionals given that it has evolved over the last 15 years to meet their demands. Kroner said that the strategy had delivered 4-times the risk/return rate versus equities over the last 20 years. The days of stacking assets into concentrated bets (think Soros shorting the sterling) are over. “These strategies are much more transparent and investors have a clear understanding of the driver behind investment decisions,” said Kroner.

Also, given the uncertainty of global markets, the fact that global macro managers can invest in anything is a real advantage. In response to inflationary concerns he may go long fixed income and short equities. On quantitative easing concerns he may short the dollar. All investment views can be expressed, which investors like.

“Global macro is one of the most liquid strategies in the hedge fund space and able to deliver diversified returns. It’s no longer a case of ‘have a hunch, buy a bunch, go to lunch’. Sound economic decisions, liquidity and a clear evolution enable global macro to meet the needs of today’s institutional investors,” said Kroner.

BAI is one of the largest AI shops globally with AUM north of USD116billion.

 

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