If the holy grail of investing lies in the concept of non-correlated return streams with which to build truly diversified portfolios, insurance-linked securities (ILS) should emerge as one of the options for investors; but they are still not well-understood. That was the message that John Wells, co-founder and chairman of London-based Leadenhall Capital Partners, had for The Inside Network’s recent Alternatives Symposium.
Gold’s spectacular rise has been a feature of the markets over the last couple of years, and judging from how the investment banks are sharpening the pencil on their price targets, that trend seems likely to continue, as gold’s ‘NETGO factor’ intensifies.
Deploying alternatives: A practical framework for advisers
One of the biggest challenges in alternative investing is defining what qualifies as an alternative. Traditional asset classes—equities, bonds, and cash—are well understood, but alternatives encompass a wide array of investments that defy simple categorisation.
As Kev Toohey explained, “The word ‘alternative’ really means different from the usual, which tells us two things: first, it’s not immediately clear what we’re investing in, and second, it’s only defined in contrast to something more traditional.”
Because of this ambiguity, investors must carefully map alternative opportunities to existing asset classes and assess their characteristics. This process requires more than just classification—it demands an understanding of how these investments interact with broader portfolio objectives, such as risk mitigation and return enhancement.
Atchison is an Australian asset consultancy that provides research and portfolio construction advice for wealth managers, financial advisers, and institutional investors. The firm focuses on alternative investments, risk management, and tailored asset allocation strategies, helping clients incorporate non-traditional investments into their broader portfolios.
In its latest research, Atchison outlines four primary methods for incorporating alternatives into a portfolio. The first is a dedicated alternatives sleeve, where investors carve out a distinct portion of their portfolio for alternative investments, typically reallocating from both fixed income and equities. This approach ensures a clear, dedicated exposure but raises the question of how to benchmark these investments.
Another approach is separating alternative assets into growth-oriented and defensive categories. As Toohey noted, “This approach helps address benchmarking concerns, as investors can align their alternative investments with either equity-like or bond-like return profiles.”
Some investors choose to integrate alternatives directly into existing asset class allocations, such as treating private credit as part of a fixed income sleeve or private equity as part of an equities allocation. This reduces tracking error but requires investors to be comfortable with the liquidity and risk profiles of these assets.
Finally, a side-pocket approach allows investors to allocate illiquid or complex alternatives separately. “Platforms often have liquidity constraints,” Toohey explained, “so advisers may need to create dedicated side pockets for assets like private debt or closed-end private equity vehicles.”
Liquidity remains a major consideration in alternative investing. While illiquidity can provide a premium, it also presents challenges in portfolio construction. “Illiquidity isn’t inherently bad,” Toohey noted. “But you need to ensure you’re being compensated for it.”
Atchison’s research highlights the importance of aligning liquidity profiles with investor needs, ensuring that illiquid investments do not compromise the overall portfolio’s flexibility. This is particularly relevant in managed account structures, where the ability to redeem assets easily is critical.
“For some clients, it makes sense to create a side pocket to house illiquid investments separately, rather than embedding them within a core portfolio that requires regular liquidity.”
A persistent challenge with alternatives is the lack of clear benchmarks. Traditional asset classes have well-established indices, while alternatives often do not. “It’s difficult to benchmark alternatives,” Toohey admitted, “because they don’t fit neatly into a single risk-return profile.”
Atchison’s research suggests that investors should focus on the role alternatives play within the portfolio rather than trying to match them to a single index. Private equity may be assessed relative to public equity markets, but with an understanding of the additional illiquidity risk and return dispersion. Similarly, private credit may be benchmarked against corporate bonds but with a premium for its less liquid nature.
Beyond diversification, alternatives offer unique benefits, including enhanced downside protection and access to return drivers unavailable in traditional markets. Atchison’s framework categorises alternatives into two broad segments: return-seeking strategies and risk-mitigation strategies.
Investments such as private equity, venture capital, and hedge funds aim to generate outsized returns through active management, information advantages, and inefficiencies in opaque markets. Assets like infrastructure, real assets, and certain hedge fund strategies provide stability by reducing portfolio reliance on equity and bond correlations.
Toohey emphasised the importance of assessing whether an alternative investment falls into one of these categories and whether it adds genuine diversification. “If you don’t understand how and why a strategy adds value—don’t invest,” he cautioned.
Atchison’s decision framework helps advisers determine the best approach for allocating alternatives based on two key factors: liquidity constraints and tracking error tolerance.
Using these criteria, advisers can decide whether to integrate alternatives into existing allocations, create dedicated sleeves, or establish side-pocket structures. The framework is particularly useful for tailoring solutions to different investor types, from institutional funds to individual clients.
The integration of alternative investments is no longer a niche consideration—it is a necessity for building resilient portfolios. Atchison’s research provides a roadmap for advisers looking to navigate the complexities of alternative investing.
Whether through dedicated allocations, integrated structures, or side-pocket approaches, the key is to ensure that these investments align with broader portfolio objectives.
As Toohey concluded, “Alternatives aren’t just an add-on—they’re a fundamental tool for modern portfolio management.”
