Article
Alternatives under the microscope 2024
27 January 2025
Welcome to Uncommon Truths, Paul Jackson and Andras Vig’s regular in-depth look at the big topics impacting markets.
Alternative assets were mixed in 2024, with Bitcoin and private equity at the top of the rankings, and direct real estate and wine at the bottom (see chart, which also includes some conventional assets).
Bitcoin and private equity have tended to occupy the extremes of the rankings -- when they are good, they are very very good, and when they are bad, they are horrid! Hedge funds tend to be more stable but with a risk-reward profile no better than government bonds.
With a US president launching his own cryptocurrencies at the same time as deregulating the industry, it may be thought that Bitcoin could have another good year. However, I think a lot of good news is in the price and prefer private equity as a high beta choice for 2025 (perhaps aided by monetary easing and accelerating economies). I also favour bank loans, MLPs and direct real estate.
Catch up on the last few editions:
FAQs
The optimal portfolios are theoretical and not real. We use optimisation processes to guide our allocations around “neutral” and within prescribed policy ranges based on our estimations of expected returns and using historical covariance information. This guides the allocation to global asset groups (equities, government bonds etc.), which is the most important level of decision. For Uncommon Truths, the optimal portfolios are constructed with a one-year horizon.
We’ve chosen to include equities, bonds (government, corporate investment grade and corporate high-yield), real estate investment trusts (REITs, to represent real estate), commodities and cash, on a global level. We use cross-asset correlations to decide which decisions are the most important.
Using a covariance matrix, based on monthly local currency total returns for the last five years, we run an optimisation process that maximises the Sharpe Ratio. Another version maximises Return subject to volatility not exceeding that of our Neutral Portfolio. The optimiser is based on the Markowitz model.
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