Investment managers at UBP Alternative Investment Solutions and TIME investments discuss the outlook for alternatives in 2023, as well as the performance of a number of alternative strategies over the past quarter.  

The first quarter of 2023 saw a continuation of the rally in risk assets that started in the fourth quarter of 2022, as markets were pricing that peak interest rates are behind us, Kier Boley, CIO of UBP Alternative Investment Solutions, said this week. 

Markets continued to be volatile over the period. “The quarter started with a very strong rally in January, followed by a strong correction in February and was punctuated in March by the crisis of confidence in US regional banks and the takeover of Credit Suisse by UBS. Government guarantees on deposits and central banks increased dovishness, [and] managed to calm down markets, which ended March in positive territory,” Boley continued. 

In terms of regions, developed markets outperformed emerging markets, with Europe continuing its strong run since the second half of 2022. “Fixed Income markets rallied across the board, driven by high yield, investment grade, but also government bonds and emerging market debt. Commodities were down, driven by energy prices,” he said. 

“On the economic front, some positive surprises on global growth, along with the reopening of China had a positive effect on business sentiment, which helped push equity markets higher,” he added. Nevertheless, core inflation remained stickier. “A growing consensus points to an upcoming recession, which could lead markets to focus on company fundamentals once again and dispersion could return as a result,” he said.

Outlook
At the strategy level, Boley’s outlook remains consistent with previous quarterly reports. "Within equity L/S, our preference is for less directional/low net exposure managers, but at some point, investors should rotate into more directional sector specialists. For diversifying strategies, macro and commodities should continue to have above trend opportunities, but as we saw in March, the path will remain volatile given the lagged impact of tighter monetary policy on the global economy. In fixed income, the widening in select credit markets has created an attractive entry point for long-term opportunities,” he said.

Infrastructure
Meanwhile, Andrew Gill, co-fund manager of the TIME:UK Infrastructure Income fund, believes that alternative investments, such as infrastructure, have never looked more attractive. Yet retail investors remain under-allocated in the sector. 
 
“This is set to change,” he said. According to a report by data provider Preqin, private capital assets under management are set to double by 2027, fuelled partly by greater retail investor interest in alternatives. See here.

“UK Infrastructure investment is already attracting interest from retail investors,” he continued. In 2021, UK infrastructure investments held by IA members stood at £40 billion ($50 billion). It offers an alternative to the current unpredictable stock markets and for those looking for long-term inflation-linked assets that can help to diversify a portfolio and align with environmental, social, and economic considerations.

“The sector is also set to benefit from the UK government’s £650 billion infrastructure investment programme, and has, over the past five years, improved its regulation, transparency, and liquidity, increasingly making it an investment opportunity for private investors,” he said. 

In addition, the government reinforced its commitment to green infrastructure in October 2021, by releasing the Net Zero Strategy which includes targeting £90 billion of private investment by 2030, creating an attractive environment for renewable infrastructure.

“Investment in the digital infrastructure sector is also significant, making it an attractive opportunity,” Gill continued. In 2021, the UK’s technology sector attracted £27.4 billion in private capital, and the government’s ambition to make the country a “global science and tech superpower,” could see the sector’s annual gross value-added increase by an additional £41.5 billion by 2025. “Digital infrastructure assets can also provide long-term inflation-linked returns which help protect portfolios against rising interest rates,” he concluded.