Uncorrelated / Alternative Alternatives

Description

“Alternative alternatives”, which we also refer to as non-traditional betas, are one of the most compelling elements of our clients’ portfolios. We define alternative alternatives as investments where the underlying risks are uncorrelated, or less correlated, with both traditional market returns and also returns from traditional alternative asset classes such as private equity, real estate or hedge funds. Most asset classes are still highly linked to the interest rate, corporate earnings and real estate cycle, and thus alternative alternatives provide significant diversification benefits but without the sacrifice of potential return. We do not consider alternative alternatives as an asset class in itself, as the investments often cut across other asset classes.

Alternative alternatives encompass a wide range of strategies but can be broadly categorized into (a) investments which are dependent on uncorrelated events such as litigation funding, drug trial funding, appraisal rights, insurance or life settlements and (b) investments which offer uncorrelated income streams such as royalties (drug, technology, or entertainment), leasing strategies, consumer lending and other lending strategies where the nature of the underlying collateral is uncorrelated. Although many consider antiques, art and vintage cars to be attractive alternative investments, relative to what we describe above, they are disadvantaged by their lack of income, economic utility and consistent valuation metrics.

How we invest

As the majority of alternative alternatives are in less proven asset classes, it is imperative to construct a diversified portfolio. We are focused on identifying best-in-class asset managers in many of these sectors and invest through a combination of commingled funds, separate accounts, bespoke joint ventures and co-investments. The majority of our private alternative alternatives investments are held in our evergreen Partners Capital Phoenix II vehicle which includes both private debt and uncorrelated illiquid strategies. We also offer bespoke specialist mandates for larger clients.

Case Study

In 2017, we established a joint venture with IMF Bentham, an ASX- listed company, to provide litigation funding in Australia, Europe, Canada and South East Asia. Litigation funders finance the legal costs of pursuing a claim in exchange for a share of the any settlement or award, which across a diversified portfolio provides an uncorrelated return stream with a comparatively low probability of capital impairment. IMF Bentham is one of the pioneers of the litigation funding industry with a track record since 2001 of more than 160 concluded cases and a 2.5x multiple on invested capital. Our joint venture was structured simply as a preferred equity investment in the fund whereby we earned a 12.5% preferred return on our invested capital with a 20% share of the residual proceeds. For clarification, no clients were invested directly in the fund, only through this preferred equity position.