Beyond Beta: How to Use Alternatives to Replace Public Equity

A purpose-built portfolio of alternatives can replicate the return profile of public equities while mitigating key vulnerabilities of the asset class—namely high volatility, elevated inflation sensitivity, and a shrinking investable universe. We explore what such an alts portfolio can look like and discuss practical considerations to replacing public equity with alternatives.

A purpose-built portfolio of alternatives can replicate the return profile of public equities while mitigating key vulnerabilities of the asset class—namely high volatility, elevated inflation sensitivity, and a shrinking investable universe. In this paper, we explore what such an alts portfolio can look like and discuss practical considerations to replacing public equity with alternatives.

Key Takeaways

• A series of secular changes affecting public equity markets and a surge in inflation have accentuated some of the vulnerabilities of public equities as an asset class. Public equity markets are becoming more concentrated and less viable as a source of alpha. The asset class is also susceptible to inflation and subject to high levels of volatility.

• In crafting this paper, we asked the question: Can we build a portfolio able to keep the positive traits of public equity—namely relatively high returns—while mitigating its unwanted vulnerabilities?

• In a word: Yes. Our work shows that replacing some public equity allocations with a portfolio consisting of private equity, private debt, and real assets can deliver potential returns on par with or above those of public stocks, while reducing volatility, providing enhanced protection against inflation, and expanding the investable universe.

• Building and maintaining this type of alternatives portfolio is a complex and demanding task. Investors will have to contend with new challenges, such as liquidity and vintage risks, manager selection and access, and cashflow management.

• Asset managers are offering new solutions that aim to mitigate the challenges and simplify the process of investing in alternatives. These solutions can make it practical for both institutional and individual investors to enhance potential risk-adjusted portfolio returns by replacing some of their public equity allocations with alternatives.