Guy Saintfiet, partner and head of EMEA fund management in Aon’s Investment practice in the UK, said: “Against a backdrop of heightened market volatility and expensive equity and credit market valuations, institutional investors, such as defined benefit pension schemes, are trying to navigate financial turbulence. Furthermore, in the past few years, and particularly since the 2022 gilts crisis, many have found themselves overweight in allocations to illiquid assets. That can be an issue in itself, but is especially a problem for schemes with aspirations to move to an insurance-based solution. Liquid diversifiers – alternatives strategies which invest in a range of asset classes and investment styles in both accessible and liquid ways – offer a path to portfolio resilience with genuine diversification. These strategies can help mitigate equity and credit market risks while contributing to consistent and uncorrelated absolute returns.
“However, investors must be clear on their objectives when deciding whether to allocate capital to liquid alternatives. For example, investors with a more short-term investment horizon, such as schemes looking to buyout in the near future, will value a steady return profile. For them, investing in liquid alternatives can play a vital part in maintaining a diversified and more resilient portfolio.”
The process of allocating liquid alternatives can be a challenge for all but the largest institutional investors, as it requires significant expertise and resources. This is why the best approach is often to outsource the implementation.
Guy Saintfiet continued: “Strategic design is vital to ensure a resilient portfolio that can deliver returns across changing market circumstances. This requires investors both to identify skilled managers who can generate consistent and uncorrelated returns, and also to monitor and actively manage the portfolio of underlying strategies and managers as market conditions evolve. Size and speed of execution is also crucial when trying to access highly skilled managers and in negotiating terms.”
Tim Banks, partner in Aon’s UK investment practice, said: “When implemented correctly, our experience is that a liquid alternatives allocation can be a vital portfolio component for institutional investors looking to target steady absolute returns or when they want to improve the resilience of their portfolios. We’ve seen growing demand from clients for diversification and growth assets that provide downside protection - this solution perfectly aligns with these requirements. Even amid unprecedented market volatility in recent years, Aon’s liquid alternatives solution still met its performance target, delivering uncorrelated returns when clients needed stability the most. This achievement is a testament to our investment team’s implementation techniques which have consistently supported strong performance despite challenging conditions.”
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