Rothschild Private Bank believes asset allocation should favour hedge funds while it chooses to be neutral on equities over the next year in its asset allocation report for 2011.

In terms of alternative assets, the bank remains upbeat on the outlook for hedge funds and will continue to back talented hedge fund managers, looking to the strategy as an attractive alternative to investments in other asset classes, particularly bonds.

The position on gold remains positive as, although gold prices have fallen from their recent record highs, the firm believes gold is a compelling alternative to weak paper currencies. In general commodities are set to improve, particularly as they should benefit from the inflationary policies of central banks, says Rothschild.

“There are, however, a number of risks to the ongoing recovery. 'Cost-push' inflation may become a growing concern and, in response, central banks may either raise interest rates too quickly (threatening recovery) or too slowly (allowing asset price bubbles to develop, and inflationary expectations to spiral)," said Dirk Wiedmann, head of investments at Rothschild Private Bank.

In regards to equities, the firm remains neutral. This decision was made despite the recognition that a number of factors that could support a further rally in equities, due to the growing signs of complacency among investors in recent weeks, a factor that creates nervousness.

Regionally, the firm has a preference for the developed markets, viewing rising inflation rates as something to look out for in emerging markets. Furthermore, in terms of sectors Rothschild Private Bank remains cautious on financial stocks.

The bank recommends a low allocation to bonds as it sees little value left among investment grade corporate bonds, and the outlook for emerging market and high yield debt is also fairly mixed. Finally the outlook for real estate is believed to vary greatly by market.