Right skillsets vital to investing in alternative assets and hedge funds

The type of economic environment that would produce a return on investment is one of the strongest considerations

Industry leaders during a panel discussion at the Wealth Today Summit in Dubai on Tuesday. Photo: Wealth Today

Investors considering alternative assets and hedge funds need the right skillsets to successfully identify opportunities and navigate their way, especially during today's volatile investment environment, industry leaders have said.

The type of economic environment that would make one's investments yield a return should be a strong consideration — and being able to pinpoint this should not depend on impulse or potentially overhyped trends, experts said at the Wealth Today Summit in Dubai on Tuesday.

Experience and knowing the right strategy will also determine the success of an investment, as well as understanding the risks, said Hashim Kudsi, co-founder and managing partner of Liwa Capital Advisers.

“A true alternative private equity [firm] is one that can buy a company, fix it and then sell it, versus just someone who buys something to leverage on it [to] capture the return. A venture capital firm backs a company, supports it and helps it to the next stage,” Mr Kudsi said.

“The overarching theme is that they all have economic exposure, so it’s no surprise that all of these are down because they’re all geared towards stable inflation and rising growth, with the exception of commodities which are benefiting from this environment.”

Alternative investments are supplemental assets to traditional investments. Assets under management (AUM) in the global alternatives industry are projected to nearly double over the next five years to $23.21 trillion, according to London-based capital markets firm Preqin.

Hedge funds, meanwhile, pool investors' money and invest it to make a return. AUM in the sector hit $4.53tn at the end of 2021, the first time it topped the $4tn mark and a turnaround from when it fell below the $3tn level in the first quarter of last year, industry tracker Hedge Fund Research said.

As with any asset class, economic and geopolitical situations must be taken into consideration in those two platforms — and the present environment presents a very challenging scenario.

“Everybody knows an opportunity — the question is do we increase exposure to returns on investment?” said Obediah Ayton, managing general partner at Luxembourg-based Synaptech Capital.

“Everybody knows you can buy this year and make [a return of] two or three times that just on the market comeback.”

Mr Ayton was referring to the challenging year markets have faced and the expected rebound in the near term.

Global markets have had a rough ride in 2022, with the S&P 500 remaining in a bear market after last week dropping more than 20 per cent below its record. The index is down 21.51 per cent year to date.

Central banks were forced to increase interest rates to temper soaring inflation, led by the US Federal Reserve, where inflation is at a 40-year high. Recession fears are also rife.

Commodities, meanwhile, have gained mainly because of Russia's military offensive in Ukraine that started in February, with gold spiking to above $2,000 in March before pulling back. Oil has soared, with Brent almost hitting $130 a barrel in early March amid the conflict.

“Private equity knows that there are so many undervalued companies that you can take majority ownership and increase the value and sell in multiples,” Mr Ayton said.

Cryptocurrencies and decentralised finance (DeFi) have been pitched as attractive alternative investments by their advocates, who champion their secure nature because they are based on blockchain technology.

However, with the crypto market in a downward spiral — the latest in its long history of volatile prices — investors are naturally hesitant to bet on the asset.

However, Gaurav Dubey, chief executive of crypto incubator and advisory TDeFi, argues that the latest crash is an eye-opener for the market and an indicator of its correlation to mainstream asset classes.

“It's not a crypto crash; it's a market crash. Practically everything has crashed, we're living in an absolute market crash — and in a way it's good news for crypto because now people are able to see its direct relationship to the markets,” Mr Dubey told The National.

“It's rising with the markets, it's dying with the markets; people can at least relate them to the real markets and find a trend that is dependable for them.”

Investors are also wary of suffering the same fate as Archegos Capital Management, which collapsed after losing about $20 billion in March 2021. Its owner Bill Hwang was charged with racketeering and fraud the following month.

The Archegos collapse cost global banks, including Credit Suisse, Nomura Holdings, Morgan Stanley and Deutsche Bank more than $10bn in losses.

“I do agree that the average person should have access to alternatives, but I would caution on people’s perceptions of doing deals. At the end of the day, you want to distinguish between skill and just being in the market,” Mr Kudsi said.

“Unfortunately, the bulk of what you get to see is stuff that you can do yourself. People have to be realistic about what they’re investing in.”