While most investors want alternatives that are uncorrelated or have low correlations to equities, an alternatives allocation is rarely that, Pengana Capital head of distribution Damien Crowley has warned.
Dumping all investments into one bucket because they were different from standard categories relied on flawed logic and was meaningless, Crowley said, suggesting the ‘alternatives' category should be replaced with an ‘uncorrelated' category.
"The crucial issue is the investment outcome — for investments to be bucketed together, they should deliver similar investment outcomes," Crowley said.
He said allocators were often confused between lack of correlation and lack of mark-to-market pricing, which meant many investments included in the alternatives category were correlated to equities.
"If an investment is not priced, then this does not mean that its value does not change with changes in markets," he said.
This could result in flawed reasoning behind investment decisions, according to Crowley, such as including listed infrastructure in the equities category and unlisted infrastructure being in the alternatives category — even where the underlying infrastructure assets were identical.
If similar assets in a listed form correlated with equity markets, they should be excluded from an uncorrelated category which would exclude property, infrastructure and private equity.
