Intro: The consensus is private alternatives will achieve higher returns and meet future obligations while also being able to protect against excessive downside risk. Pension and endowment portfolio managers use private alternative investments for good reason.
For the past two decades, there has been a fundamental shift in prudent capital investment philosophies. Pension, endowment, and ultra-high-net-worth investors have been allocating more of their assets toward alternative investments because of chronically low bond yields, central bank intervention, sky-high stock valuations, and a global pandemic to name a few flies in the ointment.
The frenetic new normal has revealed a series of “winner” and “loser” asset classes - most notably amongst the winners - the unrivaled and steady performance of private alternative investments.
The consensus is alternatives will achieve higher returns and meet future obligations while also being able to protect against excessive downside risk. Pension and endowment portfolio managers use private alternative investments for good reason.
First, they have a low correlation with public equity markets and traditional fixed income. In addition, private alternatives generate consistent returns with lower volatility, protect portfolios from large drawdowns or losses, and provide better risk-adjusted returns.
Despite the obvious utility of private alternatives to asset allocators, this space is not immune to recessionary environments, media sensationalism, and irrational investor behavior…with the exception of one shining star.
Low correlation with public equity markets
Life insurance asset-backed securities, better known as life settlements, achieve the enviable feat of eliminating all the potential risks of losing your money but one. Time. And that’s ok. Rome wasn’t built in a day. Time is required for almost every investment to matriculate besides a winning lottery ticket. But I’m guessing if the Lotto is your financial plan, you’re probably not that interested in asset allocation.
Life insurance asset-backed securities
Alternative investors can now buy a fixed spread in a portfolio of life insurance policies at a significant discount. Like a zero-coupon bond, life settlements create a known yield and future cashflows to ward off all the economic threats you can throw at it except time to policy maturity.