Alternatives 2020: SYZ Summit sets the vision for alternative investing

In his opening address, Eric Syz, CEO of SYZ Group, highlighted the evolutionary strides alternative investing has made in the SYZ family’s 35 years of investing in the space. The sector has traditionally been the preserve of institutional investors. However, as demand surges, access is improving for investors in both liquid and illiquid strategies. Eric believes the wave of interest in alternatives is only beginning.

He explains that pioneers and innovators in the industry can help democratise the space and deliver the benefits of alternatives to a much broader investor universe. The current backdrop, he says, also demands additional sources of uncorrelated returns that alternatives can deliver to portfolios.

With the Japanification of the developed world implying low returns for longer, the hunt for income will lead to higher levels of equity volatility. This will require investors to adopt stronger risk mitigation strategies, downside protection and drive demand for diversification through alternative assets. Eric notes these developments present an exciting opportunity for investors, as competition for capital will force managers to innovate and contribute to the evolution of the space over the coming decade.

According to Sir Michael Hintze, CEO and founder of global credit-focused multi-strategy asset management firm CQS, we are about to witness a ‘seismic shift’ in the global geopolitical balance of power, away from the US and favouring China. He observes this is already manifesting itself in the consolidation of US equity markets, with investment opportunities in China multiplying.

Nevertheless, for foreign investors, access to Chinese markets remains limited due to concerns around governance and rule of law. While investors await the opening of China, shrinking opportunities in US equity markets imply fewer return opportunities in risk assets. As this spurs equity volatility, the search for sources of diversification will intensify and investors will have to go further afield to find truly uncorrelated returns.

While real estate and precious metals are traditionally used to diversify portfolios, their performance still bears links to the macroeconomic environment. Recently, we have seen the emergence of even more esoteric investments, such as litigation finance, which are entirely uncorrelated to macro developments and traditional asset classes.

We heard from UK-based Therium about the history of the asset class. Neil Purslow explains litigation finance was born out of regulation changes at the turn of the millennium allowing third parties to provide upfront funding for claimants who cannot afford the cost of legal disputes, in return for a share of any settlement or damages. To-date, litigation finance has been provided by listed entities, family offices, or fund management companies, such as Therium – with a shift towards the latter in recent years.

Neil highlights the diversification benefits of funding legal cases that are independent of macroeconomic developments and have no bearing on each other. The most common model of litigation funding is done on a case-by-case basis. This adds another layer of diversification, allowing investors to gain exposure to different types of legal cases, claimants and defendants, as well as jurisdictions.

The high risk/high reward model of private equity and venture capital investing have particularly attracted investors of late, leading to a substantial build up in the amount of capital available for private investments. This has led to a fundamental shift in the nature of venture capital investing in the US, according to Ken Loveless of San Francisco-based Founders Circle Capital.

“Microsoft, Apple, Amazon and Facebook – four of the top five companies in the S&P 500 are venture-backed, compared to only one in 2000,” says Ken. He explains with less research being produced on small companies, going public requires scale. On the other hand, entrepreneurs are rapidly able to create viable products with less cash. Hence, companies are choosing to stay private for longer, meaning there is more value to be harvested in private markets.

Traditionally, venture capital rests on the premise ‘access is born out of absence of capital’. However, with more capital than ever in the market, access has fundamentally changed. With so much choice, Ken explains companies now look for a trusted partner rather than an investor.

Ambitious companies are more likely to choose investors with whom they have an authentic relationship, particularly where this is backed up by a strong track-record and demonstrable value-add through targeted plans for improving the probability of success. Ken gives several examples and outlines how Founders Circle Capital cultivates lasting relationships through its leadership development programme, which enables companies to grow at pace organically.

“Despite all the hype surrounding technological developments and the use of AI, quants have not yet taken over investing,” notes Matthew Granade, of Point 72 Asset Management. We have seen an explosion of data, computing power and analytical techniques, such as AI and machine learning, in recent years, which has led some managers in the hedge fund space to incorporate quant models into their processes.

The ability of models to sort through vast amounts of data, apply algorithms and make predictions allows fund managers to make better-informed decisions, more efficiently. Computers are useful – and more thorough than humans – at identifying anomalies, processing data, completing repetitive tasks and recognising patterns. The sophistication of these models is now such that they can learn and continuously improve through a closed-loop feedback process.

However, Matthew points out models are not always able to make a correct judgment on the information they collect. Moreover, humans’ ability to think creatively, generate ideas and formulate opinions is impossible to model. Hence, Point 72 Asset Management operates on the belief the best outcomes can be achieved by combining humans and systems.

Model-based systems can be used to improve research on fundamentals, as well as inform portfolio construction by simulating all possible scenarios. This is something Point 72 Asset Management is experimenting with. However, to equip discretionary investors with the best technological tools, Matthew emphasises training is essential. Not only do fund managers and analysts need to understand how to read and operate the data, data experts and statisticians need to learn how to clearly communicate their findings.