Dubai: The 30-year bond rally as well as a US equity market rally nearing 10 years are making local investors nervous.
Amid mounting uncertainty on the policy front under the new Trump administration and the rise of populism, which analysts fear could get reflected on elections in Europe, investors in the UAE have been making a beeline to a class of funds that have very low co-relation with equities or bonds.
Popularly called alternative investments, the trade finance fund, for example, has been witnessing increased inflows since mid-last year, continuing in 2017.
“The current interest rate environment, tightened margins in traditional asset classes such as fixed income, [and] volatility in equity markets have driven further demand for alternate investment strategies such as trade finance for stable income generation, diversification and wealth preservation,” Danny Jones, portfolio manager with Rasmala Investment Bank, told Gulf News over email.
Another plus is that banks are hesitant to advance to companies as they plan to reduce leverage and exposure to non-rated companies, making it more attractive for investment banks to bridge in the gap.
“From a demand perspective, as banks move towards the implementation of the Basel III [or capital adequacy] regulations and as a result an increase in operating costs, there will be a further reduction by banks providing trade finance, especially to non-rated companies,” Jones said.
This reduction will leave a huge window of opportunity for investment banks like Rasmala.
“The gap is expected to result in a widening in the global trade finance gap in 2017, providing further opportunities for alternative financiers to fill the space left by departing banks,” he added.
The trade finance industry stood at an estimated $16.5 trillion (Dh60.6 trillion) last year.
Money flow
“This trend was evidenced in 2016 with increased demand from corporates. This is in line with the fund’s core strategy of delivering consistent returns to investors, irrespective of the volatility being experienced across other asset classes,” Jones said.
Given the fund’s steady performance and greater opportunities available for investment, Rasmala raised the targeted return from the three-month London Interbank offer rate (Libor)-plus 3.50 per cent to three-month Libor-plus 5 per cent from October 1, last year.
Diversification
Alternative investment strategies offer a diversification tool.
“Since they are non-traditional investments with low correlation to traditional strategies, allocations can improve the volatility adjusted returns of portfolios,” Jones said.
Alternative investment strategies offer a wide range of possibilities — from commercial real estate, hedge funds, private equity, private placement debt to trade finance.
UBS currently recommends allocations of 16–20 per cent for most investors in alternative investment strategies.
“The core alternative investment strategy that we recommend is for investors to incorporate allocations to hedge funds and [where appropriate] private equity and other private market asset classes within a more broadly diversified portfolio,” said Karim Cherif, hedge fund strategist at UBS Wealth Management.
Risks
However, the risks associated with alternative investments strategies are many.
Risks vary from credit risk to operational forex to fraud risk. Fund managers, however, take various steps to mitigate such risks..
“While the risks are not necessarily higher than with traditional investments, they may differ greatly in terms of their nature and impact. And while they cannot be fully eliminated, they can be reduced significantly through thorough due diligence and strict investment and monitoring processes,” Cherif said.
