Back to the future: opportunities for alternative investment managers in the new era of market volatility


The period from the beginning of 2009 to the end of 2021 will almost certainly be seen by future historians as one of the greatest ever eras of equity markets growth. If you had invested $100 in the S&P 500, a leading U.S. index, at the beginning of the period, you would have had $682.13 at the end, an extraordinary return of 15.92% per annum.

Why did this happen? Economies internationally had just been through the Global Financial Crisis and policymakers and central banks were extremely concerned about a major recession following. They acted swiftly with stimulus programmes to support markets, and used unconventional instruments such as quantitative easing to boost asset prices.

The conventional economic wisdom had always been that the danger of such intervention was that it would eventually produce inflation, but there was little sign of that for most of the decade after the crisis. With economies still fragile, central banks continued to intervene to boost asset prices and markets continued to rise.

We can, however, say that this period has now ended. That is because inflation has returned at last, spurred by the Russian invasion of Ukraine and supply chain disruption from the Covid pandemic. That means central banks cannot intervene like they used to, and markets as a consequence have now fallen considerably in 2022.

And it would be unrealistic to think now that the days of huge equity market returns are going to return any time soon, given that interest rates are rising globally, economies are bracing for recessions, and markets are highly volatile.

This means we are facing a secular trend downwards in equity market returns. In fact we could be back to the pre-Global Financial Crisis era where U.S. equities were often up a lot and down a lot but net flat over sustained periods of time. For example, in the decade 1998-2008, U.S. equities experienced significant rallies and falls, but were net flat. In other words, we could be going back to the future.

All of this has huge consequences for investors. In the period 2009-2021, the high equity market returns encouraged many investors, both institutional and retail, into passively managed long equities products.
It is good to be long equities when they are going up, but not so much when they are going down. When markets are volatile or going down, investors turn to strategies and asset classes which are not correlated to the broader market or which can benefit from volatility, ie can generate positive returns from market downturns.

This is exactly what alternative investment managers do. Take hedge funds. The classic equity long/short hedge fund is both long and short the market, enabling it to generate positive returns even when the market is down. Or in the case of private equity, the fund is able to make a long-term investment in a company without being impacted by short-term market volatility. Indeed there is a multitude of alternative investment strategies that can be successful in these markets, including alternative credit, hedge, private equity, venture, infrastructure and crypto.

This creates strong opportunities for alternative investment managers. In the previous era in which being passively long in an index tracker could get you 15-20% a year, it was harder to make the case for actively managed strategies which protect against the downside.

But that has already changed dramatically with investors now pivoting towards alternative strategies and with leading analysts encouraging them to do so. For example, J.P. Morgan in their 2022 Alternative Investments Outlook, said, “A new market environment requires a new investing playbook. We encourage investors to consider, or reconsider, how alternatives more broadly can help them achieve their investment goals.”
Now is therefore a time of significant opportunity for alternative investment managers in terms of both performance and capital-raising. But to raise capital they will need to be able to communicate their differentiation and edge to sophisticated investor audiences, and to be able to maintain a strong reputation in the market.

A strategic communications programme is vital to achieve those goals, both in terms of minimising reputational risk and in terms of constructing a strong external profile for investor audiences. We have deep experience and expertise in the alternatives space and have worked with many of the leading names in the industry. We would be delighted to discuss with you how we can work together to protect and grow your business.

By Christen Thomson, Senior Director and an alternatives specialist for Citigate Dewe Rogerson.