The term "alternative" covers a multitude of very different assets, ranging in liquidity, return characteristics and ease of entry. Unsurprisingly, the pandemic affects them in contrasting ways. A research group for the space sets out some predictions.

The coronavirus pandemic gives hedge funds a chance to shine, boosts logistics assets, weighs on private equity and some infrastructure/energy assets, argues research firm {tag|Preqin">Preqin in an overview of alternative investments.

The term “alternatives investment” covers a wide spectrum of areas outside listed equities, bonds and cash, and they have been affected very differently by COVID-19, the organisation said in a report. The sector has become increasingly popular with high net worth and ultra-HNW clients, particularly organisations such as family offices which can afford to invest over a decade or more to capture the benefits of illiquid assets, such as venture capital. 

“A dispassionate analysis based on previous financial crises would suggest that we will see three major outcomes for alternative assets,” Preqin chief executive, Mark O’Hare, said. “A significant short-term slowdown in activity; a medium-term resumption of the established growth trend; and a long-term outperformance of those funds which were able to capitalise on advantages being presented now. We are already seeing this start to be borne out, with activity in 2020 down from previous years and operators telling us they expect this to characterise the year ahead.” 

Private equity firms have almost $1.5 trillion in dry powder to deploy into deals, so they are “well-placed” to take advantage of opportunities presented by a downturn, the research firm said. 

In the short run, the report said, it will be tough for private equity deals to be made because social distancing holds up meetings and the ability of people to check into investments. Retail, leisure and hospitality assets are set to be hit hard, although supermarket retail specifically will benefit. Digital technologies will benefit, particularly in non-cyclical sectors such as healthtech and remote working – accelerating interest in already-growing areas, it said. 

On private debt, the report said this year will be a test of whether private debt, such as areas of distressed debt and direct lending, can prosper as they did in 2008. “2020 will see if the asset class can repeat that feat – interest in distressed debt has spiked in Q1, and more than a third of investors are now targeting the strategy,” the report said. It added that direct lending, meanwhile, is untested in the face of a crisis, and COVID-19 may put a stumbling block in the path of the sector’s expansion.

As far as property is concerned, the report noted that rental income from businesses and private housing has seen a sharp drop since the start of March, cutting the short-term cashflow of real estate fund managers. “Deal activity is likely to be particularly depressed through the rest of 2020, given the practical challenges in evaluating properties,” the report said.

“In the longer term, COVID-19 will exacerbate the challenges already faced in the retail sector, and may deflate the market for city-centre offices. Demand for logistics assets, though, is likely to spike – last-mile delivery has emerged as a particular opportunity for expansion,” it said. 

On infrastructure investment, such as toll-based assets and travel-related assets, they have been hit hard by travel restrictions, with the impact increasing the longer that restrictions are in place. 

“Government-backed bailouts in the travel and shipping sectors are currently aimed at operators rather than asset-owners, so recompense is uncertain. Conversely, social and digital infrastructure have significant growth opportunities as demand for healthcare infrastructure and broadband networks rises. Oil price volatility continues to disrupt the natural resources industry, and more than a quarter of investors are avoiding conventional energy investments in 2020 as a result,” it said.

Preqin concluded by giving an upbeat view of the hedge fund sector.

“Losses in the first quarter of 2020 wiped out gains made by hedge funds in 2019. But the asset class did act to protect investors from worse downturns in equity markets, showing their value as a defensive strategy,” it said.

“This may reverse recent negative sentiment from investors as the downturn extends. However, it will also likely lead to a flight to safety, benefiting large managers and prompting more consolidation in the sector. New launches will fall as new managers are deterred from raising vehicles to seek investment. Strategy-wise, equities funds are more likely to see outflows, while macro and multi-strategy funds could benefit on the basis of their defensive credentials,” Preqin added.