Alternatives - Investment Companies

Alternatives - Investment Companies


A look into how alternative investment companies fared in the February market shake-up


  • The first half of February has seen the first significant increase in market volatility since 2016. Equity markets and other risky assets sold off sharply and in some instances declined by more than 10%.

  • We show that alternative investment companies have been able to protect investors from excessive losses during the recent market turbulence. Drawdowns in investment companies were typically two to five percentage points less than for comparable stocks.

  • One of the drivers of this stable performance is the lower liquidity of alternative investment companies. However, this is not the entire story, because price volatilities and trading volumes in investment companies increased to a similar extent in the February setback as they did for global stocks.

  • We show that there is some indication that one of the key drivers of the lower drawdowns in alternative investment companies is the lack of noise traders and algorithmic trading in these vehicles. Noise traders and algorithmic trading creates excess volatility in the short run and increased losses in times of heightened market uncertainty.

  • By investing in alternative investment companies, investors can avoid these short-term losses when it matters most and enjoy diversification benefits when other alternative investment vehicles such as sector-specific stocks, ETF, or open-ended funds have suffered from correlation breakdowns and excess volatility.

For the full report click here.



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