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January 23, 2025

There is no alternative. Or, at least, rather little

by Dewi John.

I saw a conference presentation recently on how underexposed the wealth management industry was to alternative investment products, relative to the broad market.

Despite this, alternatives have suffered the largest outflows by asset class—or £2.37bn—between January and October. The next largest redemptions are at £1.31bn, for real estate. It’s an interesting trend, as many pundits have tipped alternatives as an attractive bolt-hole for investors in increasingly febrile and unpredictable markets. Investors, clearly, remain  unconvinced.

Cost might have something to do with it. Investors are becoming increasingly focused on what they pay, and, in aggregate, alternatives are the most expensive asset class, calculated on a total expense ratio basis. Which stands to reason—you pay for those extra bells and whistles. That, however, has not been such a bad trade: over three years, alternatives come top, returning 11.12% after charges. Somewhat surprisingly, money market funds come second, at 9.68% (and, of course, with the lowest TER). On a longer timescale, over five years, alternatives are beaten by both equity and commodity.

Using the 12-month Sharpe ratio as an indicator of risk-adjusted returns, alternatives are rather middle of the pack, at an average 0.16, trailing equities, bonds and mixed assets.

But that’s using a very, very broad brush—the label ‘alternative’ covers a multitude of sins. We get a better sense of where UK investors are placing their bets when looking at flows at the level of Lipper Global Classification.

 

Table 1: Largest Alternatives Redemptions by Lipper Global Classification

Date: 31 December 2023 to 31 October 2024
Source: LSEG Lipper

 

The largest redemption from Alternative Credit Focus is from a high-yield strategy, followed by other share classes with more broad-based strategies.

One explanation for what’s been driving these redemptions at a more granular level might be the continuing fall from grace of the IA Targeted Absolute Return sector—something I opined on a while back. For example, the largest outflows from Alternative Credit Focus came from a fund in this sector (£638m). It’s a similar story with Alternative Global Macro, the classification with the second largest outflows (£713m), where the largest redemptions were from a Target Absolute Return fund (£493m). Similarly, Absolute Return GBP Low has the third-highest outflows YTD: while the funds that have seen the largest redemptions are not listed in this IA sector… well, the clue’s in the name.

Absolute return as a strategy has lost its shine. That said, the IA sector has fared worse, with £5.14bn of redemptions, YTD. However, the bulk of these outflows (£4.18bn) is accounted for my mixed asset funds. There is therefore no neat equivalence between the IA sector and absolute return strategies to be made here—the narrative is clearly more complex.

Nevertheless, there have been some strategies that have been very successful at asset gathering YTD, the first of which is Alternative Other (£995m). This, as the name suggests, is a mixed bag, but scrolling through the main asset gatherers throws up multi-strategy funds of funds (one with an interesting tilt to physical metals), and alternative strategies built around the gilt market. Next comes equity-based alternative strategies: Alternative Equity Market Neutral Sum (£151m) and Alternative Long/Short Equity Global (£86m).

What’s also apparent is that, within alternatives, there is virtually zero correlation between charges and flows, suggesting that those who are invested in alternatives have a relatively low cost sensitivity.

There is a clear disconnect between what many experts feel investors should be buying, and what they actually are. Why this should be the case, however, is likely driven by many, and often contradictory, factors.

 

This article first appeared in Investment Week.

LSEG Lipper delivers data on more than 380,000 collective investments in 113 countries. Find out more.

The views expressed are the views of the author and not necessarily those of LSEG Lipper. This material is provided as market commentary and for educational purposes only and does not constitute investment research or advice. LSEG Lipper cannot be held responsible for any direct or incidental loss resulting from applying any of the information provided in this publication or from any other source mentioned. Please consult with a qualified professional for financial advice.

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