How to invest in alternatives: One of the fastest growing asset classes in Australia

Make no mistake, alternative investment opportunities and managers are proliferating - rapidly. 

Research conducted by Preqin in 2019 pegged the global alternative investment market at US$10.8 trillion in value, and expected it to grow around 10% each year until 2025. By that time, the market will have ballooned to beyond US$17 trillion in value. 

Preqin also estimated that the fastest growth would be in the Asia-Pacific region, which would experience a compound average growth rate of around 25%. The reason for the outsized growth in our neck of the woods is the lack of penetration of alternatives compared to the rest of the world. 

One need only look across the local investment landscape and observe the number of global alternatives managers that have decided to cast their rods into Australian waters to know that the research conducted by Preqin in 2019 is playing out in real-time as we speak. 

But the questions remain. Is all of this good for investors? Are we better informed about alternatives, and how do we identify the best opportunities in a market that - for all its hard work - remains quite opaque?

For answers to these questions and for a critical assessment of how he selects the best opportunities in the alternatives space, I sat down with Michael Houghton, Chief Investment Officer at Lucerne Investment Partners. 

Houghton's take is that whilst he has noticed an increased awareness of alternatives in the mainstream investor market, ultimately, little has changed regarding accessibility. 

"What hasn't changed, which has surprised me, is the lack of availability for that more mainstream investor market. 

We're still the only real liquid alternatives investment available that's in the retail space for that investment market, which has been quite surprising" says Houghton.

Perhaps more importantly, however, during the following interview Houghton clearly outlines his process for selecting managers. He also articulates how alternatives can help increase the return profile of a portfolio whilst at the same time reducing risk. 

Note: This interview was filmed on Thursday, 12 October 2023. You can watch the video or read a summary of some of the key insights below.

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Key insights

Has the industry done enough to educate people about the opportunity in alternatives?

According to Houghton, there is a lot more to do:

There's a lot more work to do. Awareness is one thing, but actually ensuring that people understand what they're aware of is another.

He adds that there are a lot of funds coming into Australia but they’re still only offering options that are available to institutional investors, whilst liquidity – or lack thereof – remains a key factor.

A lot of them talk about liquidity but they're actually offering it on a very conditional basis.

What we've seen in the last few weeks is about $6 billion worth of funds being gated, meaning cancelling your ability to redeem from that fund because they were never liquid anyway.

Houghton adds that the simplest way to look at things from an education perspective is - if the underlying assets aren't liquid, then the fund can't be liquid.

That's something that investors need to keep in mind.

The other major concern of Houghton's is the lack of experience of some of the new fund managers operating in the space. He notes that many don't have the typical level of experience required or the capability to support what really can be a complex space. 

How does Lucerne sort the wheat from the chaff?