Alternative Investments are, in short, all types of investments that are not equities, bonds or cash. This means that, for example, infrastructure, private equity funds with unlisted shares or private credit fall under this category.
But also more exotic investments such as forestry or hedge funds are part of Velliv's investment universe within alternative investments. The rationale for spreading investments across many different asset classes such as equities, bonds and alternative investments instead of only investing in, for example, equities, is risk reduction through diversification, which – popularly said – means not "putting all your eggs in one basket," but instead investing in different assets that are affected by different factors, thereby smoothing out the fluctuations that naturally occur in financial markets. Furthermore, the expected returns on many alternative investments are also higher than on traditional investments, which is why they can help boost the overall returns.
Generally, one can say that alternative investments can be described with one or more of the following characteristics:
Investing in alternative investments undoubtedly requires specialist knowledge. We have that knowledge at Velliv – and it pays off.
We construct portfolios with the aim of ensuring our customers' standard of living in the future. This requires us to generate attractive returns. But also that we manage to protect our customers' wealth when strong winds blow in the financial markets. Especially with long savings horizons, which are typical for pension savings, it is important that the purchasing power of the savings is not eroded by inflation. Alternative iInvestments help us meet all these goals. Some reduce risk through diversification, while others have a high expected return. And a few reduce risk and have a high expected return.
They can do this because different factors affect their returns compared to traditional bond and equity investments, which make up the majority of investments. Infrastructure investments (utilities, data centres, wind turbines, etc.), for example, are essential in an economy and thus have relatively inelastic demand – popularly said, people do not stop using water or surfing the internet because the global economy is in recession. And the trees in the forests do not stop growing because central banks raise interest rates, and can thus contribute to stable value growth. Last but not least, the managers of Velliv's hedge fund strategies have other instruments at their disposal and can, among other things, also generate returns in falling markets.
They can do this because different factors affect their returns compared to traditional bond and equity investments, which make up the majority of investments. Infrastructure investments (roads, bridges, sewers, wind turbines, etc.) are essential in an economy and thus have relatively inelastic demand – popularly said, people do not stop using water or surfing the internet because the global economy is in recession. And natural disasters do not increase because central banks raise interest rates, so reinsurance contracts are not affected by the economic climate. Last but not least, hedge fund managers have other instruments at their disposal and can, among other things, also generate returns in falling markets.
But even when financial markets are performing well, it is a good idea to invest in alternative investments. As shown in Figure 2, they can contribute quite significantly to the overall returns.
When investing in alternative investments, one takes on different risks compared to traditional assets, such as illiquidity or construction risk in infrastructure projects. As an investor, you only do this if you are rewarded for it. We call this harvesting risk premiums. But also the fact that the markets for alternative investments are not as transparent and liquid as the equity market means that, as an experienced investor, you can generate a return.
At Velliv, we have extensive experience in investing in alternative investments, which can be divided into Private Equity, 'real assets' (forestry and infrastructure), illiquid credit, and 'other alternatives', which consist of liquid hedge funds. In fact, we have been investing in Private Equity for more than 20 years and today have a mature and well-diversified portfolio consisting of approximately 70 funds managed by 40 different managers. The funds invest based on different strategies, with the majority of the funds focusing on the acquisition of well-established companies (buyouts) and only to a lesser extent on growth companies. Geographically, the portfolio has global exposure with a focus on the most developed Private Equity markets in the USA and Europe. Alternative investments constitute approximately 11 per cent of Velliv's total managed assets, but the weight varies depending on the chosen product and risk profile.
Managing an infrastructure project or buying and selling forests around the world requires considerable resources and very specific skills. Therefore, we have specialised in finding and selecting the managers who are the best in their field and entrusting the work to them. And we do this so well that in 2023 and again in 2024, we won the award for the best indirect (fund-based) infrastructure strategy at the internationally recognised IPE Real Assets Infrastructure & Natural Capital Global Awards.
Velliv's approach to investing in alternative investments is analytical and fact-based. For example, there has generally been a perception that alternative investments can help make portfolios more robust in times of crisis. But a perception is not enough for us. To understand the underlying factors and whether it is a general robustness, our Head of Alternative Investments, Christoph Junge, conducted a comprehensive analysis of various alternative investments through historical crises. For Velliv, it is important that all risks are thoroughly understood to make the right investment decisions. The results of the analysis thus have a direct influence on the established investment strategy for alternative investments.