From crisis to confidence: leveraging alternative assets and data for investment security

October 2024  |  SPECIAL REPORT: PRIVATE EQUITY

Financier Worldwide Magazine

October 2024 Issue

We live in interesting times. While innovation drives our enthusiasm for the future, the uncertain nature of global geopolitics and the escalating impacts of climate change leave room for anxiety.

Interesting times are not always what investors want. Market uncertainty means insecure positions for portfolios composed of traditional assets like stocks and bonds. When uncertainty abounds, it is time to look for alternative solutions. In 2024, alternative assets and alternative data are enjoying another big year, particularly for those who effectively use these alternatives.

The growth of alternative assets

If we follow the conventional understanding of investment, which is centred around stocks, bonds and cash, alternative assets are often pushed to the periphery. However, the periphery is much broader than the centre. Various asset classes, from traditional ones such as commodities and real estate, to new ones like cryptocurrency, are often deemed viable alternatives.

In institutional investment, alternatives have always been overshadowed by their more liquid and closely regulated traditional counterparts. However, alternative asset classes have become more popular in recent years. Comprising only 6 percent of the global investable market 15 years ago, they are expected to grow their share to 24 percent by 2025.

Alternative fund managers the world over are projecting that 2024 will be another significant year, with around 85 percent expecting an increase in capital raising.

What is driving this growth?

Investor faith in alternatives is reasonably driven by their recent performance. Over the last three years, Blackstone Group’s Alternative Assets Management (BAAM) unit outperformed its traditional 60-stocks/40-bonds portfolio by almost 12 percent.

These results align with historical trends and encourage investors already looking for ways to ride out the stormy markets. According to JP Morgan, the main investor concerns in 2024 will be those where alternative assets are known to add support – diversification, hedging inflation and alpha.

Increased retail investors’ access to alternative investments is another growth driver. Younger generations are the driving force in this regard. While older generations already have the financial cushion to patiently wait for long-term returns, Gen Z and millennials seek to improve their current economic situation. That, and feeling comfortable with new technology and financial instruments like cryptocurrency, drive young investors to seek alternatives.

For these generations, social media plays a crucial role in investing. It influences them to choose riskier but more rewarding alternatives and serves as an alternative source of knowledge about investing.

Nevertheless, alternative investments are still dominated by the ultra-wealthy, who tend to have alternative assets making up 50 percent of their portfolios. Given their high stakes in alternative investments, one can be sure that these investors go far beyond social media when sourcing investment intelligence.

Alternative data in investment

Thinking about investing, many imagine investors researching stocks and bonds by looking at US Securities and Exchange Commission filings, press releases and financial statements. This is the traditional picture.

The alternative picture is bigger. Both alternative assets and alternative data have more types than their traditional counterparts. All data types outside the official data sources are considered alternative data.

Often, alternative assets and data are larger in volume. Real estate alone is the world’s largest asset class. Online real estate listings provide an extensive data source for meaningful insights into this investment vehicle. One can scrape these listings for price, location, description and other crucial data. Another alternative data source, geolocation, provides information on movement patterns around the property. Thus, it is especially handy for investing in commercial real estate that depends on the number of potential customers passing by.

Similar ways of utilising alternative data sources for investment intelligence are applicable to all types of alternative assets. For example, private equity investors can benefit from online job postings data and firmographics. Most importantly, large-scale alternative data collection is paramount for investors with diverse alternative asset portfolios.

Data opens the doors to diversification

Despite the clear advantages of diversification, not all investors and fund managers feel comfortable utilising alternative assets for it. Some level of insecurity is understandable. To effectively use the versatility of alternative investments, one needs to understand many relatively unfamiliar markets.

Other major concerns related to such assets include higher fees and a tough time getting out of the investment once it is made. Higher initial investment and relative illiquidity are also among the main factors that historically made alternative assets available mostly for the rich.

These concerns make access to alternative data a necessity. Only with versatile, accurate and up-to-date information can investors securely invest in illiquid and costly alternatives. Many ultra-wealthy investors seem to agree, since alternative data provider revenue is set to surpass that of traditional data providers before the end of the decade.

Thus, access to premium data collection solutions is as important as larger financial capital in enabling the rich to dedicate a significant share of their portfolio to alternatives. Ultra-wealthy investors could just as well continue making their money from traditional investments. It is the certainty of having the best information available that encourages investors to look for diversification in often riskier and less regulated investments when stocks and bonds are underperforming.

However, although cutting-edge data-gathering technology might be more available to high-net-worth and institutional investors, alternative data can also advance the general democratisation of investment. Retail investors can benefit from simple web scraping tools that allow a more systematic approach to investment research than adhering to sporadic advice from podcasts and social media posts.

Summing up

Alternative assets are generally only loosely correlated with traditional markets. Thus, in uncertain times such as these, alternative investments can provide a level of security that increases the portfolio’s health.

While still less familiar than mainstream investment, these assets are better understood and monitored with the help of alternative data sources. Despite being dubbed alternatives, many of these sources are publicly available. One might consider this crucial investment intelligence a public secret of the rich.

As data extraction technology evolves, increasingly better solutions will be available to all investors, forcing us to reconsider whether it is time to rebrand alternatives as the universal vehicle for financial diversification.

 

Gediminas Rickevičius is vice president of global partnerships at Oxylabs. He can be contacted by email: gediminas.rickevicius@oxylabs.io.

© Financier Worldwide

BY

Gediminas Rickevičius

Oxylabs

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