Traditional investment strategies can fall short in navigating the complexities and volatility of today’s financial markets, says Ryan Paterson, Portfolio Manager, Schroder Investment Solutions. Consequently, in the following analysis, Paterson explains how portfolio managers are increasingly turning to liquid alternative assets as a compelling solution for enhancing performance and diversification.
Liquid alternatives: expanding the investment toolkit
Liquid alternatives encompass a wide array of investment strategies that are not confined to the traditional categories of stocks and bonds.
This includes hedge funds, managed futures, commodities, real estate investment trusts (REITs), and other instruments that offer daily liquidity.
There are four key benefits of using liquid alternatives:
1. Enhanced diversification: a smarter way to manage risk
Liquid alternatives are not directly correlated with equities and bonds and can help mitigate risk during fluctuating economic conditions and improve risk-adjusted returns. For instance, while equities may decline during market downturns, liquid alternatives such as commodities or hedge funds, may perform differently, thereby smoothing out overall portfolio performance.
2. Access to non-traditional strategies: broadening the investment horizon
Including liquid alternatives offers exposure to a diverse range of investment strategies that are typically inaccessible through traditional asset classes. This includes alternative risk premium, long/short equity, and global macro strategies. This enables portfolio managers to take advantage of niche opportunities and trends that traditional investments may overlook, potentially boosting returns.
3. Flexibility and liquidity: agility without the compromise
Liquid alternatives provide investors with flexibility and immediate access to their capital, in contrast to many traditional hedge funds with lengthy lock-up periods. The ability to quickly enter and exit positions enhances agility in portfolio management, allowing portfolio managers to respond quickly to changing market conditions. This liquidity is particularly beneficial during periods of heightened uncertainty, when swift action can help to capitalise on emerging opportunities or to safeguard against losses.
4. Risk management: strengthening portfolio resilience
Liquid alternatives can strengthen a portfolio by improving risk management. They use tools like options, swaps, and futures to protect against market downturns. They also utilise advanced models to assess exposure to various risk factors, such as market risk, credit risk, liquidity risk, and others, enabling managers to identify and mitigate potential vulnerabilities in their portfolios.
5. Competitive performance: delivering results in diverse market conditions
Historically, liquid alternative assets have demonstrated a capacity for competitive performance in various market environments. With the increasing sophistication of investment strategies and the ability to adapt to market changes, many liquid alternatives have outperformed traditional assets over different time horizons. This potential for alpha generation makes them an attractive addition to portfolios, particularly in a low-return environment.
The challenges facing alternatives
While the benefits of liquid alternatives are clear, there are significant access and ownership challenges that must be addressed to fully realise their potential:
1. Access challenges
– High minimum investments: this is one of the most common barriers to accessing liquid alternatives which can exclude individual investors and smaller institutions.
– Limited availability on platforms: hedge funds often do not appear on UK investment platforms due to regulation, targeting, complex strategies, liquidity preferences, cost structure, and capacity.
– Regulatory barriers: some funds may only be available to accredited investors and face strict compliance rules.
2. Ownership challenges
– Lack of transparency: information about strategies, performance, and fees is often limited and this lack of transparency can deter potential investors.
– Complex strategies: hedge funds often use complex investment strategies that include leverage, derivatives, and short selling. These strategies may hedge funds may prefer direct relationships with their investors, ensuring that those involved fully understand the risks and complexities associated with their investments.
– Due diligence requirements: by thoroughly researching managers, understanding strategies, evaluating risk management frameworks, and maintaining continuous oversight, investors can make informed decisions that align with their investment objectives.
Introducing the Schroder Alternative Portfolio
The Schroder Alternative Portfolio was launched on 1 September 2023 to make liquid alternative investing more accessible and transparent for clients. It addresses common access and ownership challenges through a multi-manager fund, offering professional management and diversified exposure across a range of liquid alternative strategies. Moreover, the fund’s multimanager structure of varied liquid alternative strategies can deliver enhanced diversification benefits that surpass those of any individual strategy.
By leveraging our expertise and commitment to innovation, we aim to meet the complex needs of our clients, providing an investment solution that addresses both current market challenges and future opportunities.
As at the end of April 2025 the fund has delivered an annualised return since inception of 7.5% with low levels of volatility and correlation to traditional asset classes.
The Schroder Alternative Portfolio is integrated into our Active Model Portfolios, while the underlying liquid alternatives are utilised within our multi-asset strategies.
Risk and return characteristics
Past performance is not a guide to future performance and may not be repeated.
Final thoughts
We believe adding liquid alternatives to portfolios offers clear benefits: greater diversification, access to innovative strategies, better risk management, and stronger performance potential.
As markets grow more complex, improving access to and understanding of liquid alternatives will enable more investors to benefit from these advanced strategies. Proactive solutions such as the Schroder Alternative Portfolio are essential to fully realise the value that liquid alternative assets can bring to investors.
Click here to read our latest insights or to find out more about Schroder Investment Solutions. Alternatively, contact your usual Schroders’ representative or call our Business Development Desk on 0207 658 3894.
Access the 2025 Multi-asset Fund Insights Report here
Ryan Paterson, Portfolio Manager, Schroder Investment Solutions
Risk considerations
ABS and MBS risk: The fund may invest in mortgage or asset-backed securities. The underlying borrowers of these securities may not be able to pay back the full amount that they owe, which may result in losses to the fund. Contingent convertible bonds: The fund may invest in contingent convertible bonds which are bonds that convert to shares if the bond issuer’s financial health deteriorates. A reduction in the financial strength of the issuer may result in losses to the fund. Currency risk: The fund may lose value as a result of movements in foreign exchange rates, otherwise known as currency rates. Derivatives risk: Derivatives, which are financial instruments deriving their value from an underlying asset, may be used to manage the fund efficiently. The fund may also materially invest in derivatives including using short selling and leverage techniques with the aim of making a return. A derivative may not perform as expected, may create losses greater than the cost of the derivative and may result in losses to the fund. High yield bond risk: High yield bonds (normally lower rated or unrated) generally carry greater market, credit and liquidity risk meaning greater uncertainty of returns. Interest rate risk: The fund may lose value as a direct result of interest rate changes. Liquidity risk: In difficult market conditions, the fund may not be able to sell a security for full value or at all. This could affect performance and could cause the fund to defer or suspend redemptions of its shares, meaning investors may not be able to have immediate access to their holdings. Market risk: The value of investments can go up and down and an investor may not get back the amount initially invested. Multi-Manager risk: The fund allocates capital to multiple strategies managed by separate portfolio managers who will not coordinate investment decisions, which may result in either concentrated or offsetting risk exposures. Operational risk: Operational processes, including those related to the safekeeping of assets, may fail. This may result in losses to the fund. Performance risk: Investment objectives express an intended result but there is no guarantee that such a result will be achieved. Depending on market conditions and the macro economic environment, investment objectives may become more difficult to achieve. Private Assets risk: Investments in private assets carry greater counterparty and liquidity risk. As there is no active market for private assets, it could prove difficult to sell and objectively value the fund’s assets. The fund may have to lower the selling price, sell other investments or forego more appealing investment opportunities. The actual value may not be recognised until the assets are sold. Real estate and property risk: Real estate investments are subject to a variety of risk conditions such as economic conditions, changes in laws (e.g. environmental and zoning) and other influences on the market.
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