Alternative times call for alternative solutions

[source](https://www.marketviews.com/wp-content/uploads/2018/12/candy-588021_960_720-760x490.jpg) It’s been a fantastic decade for equity markets, but now there is a growing consensus among money managers and economists that we are entering the latter stages of the business cycle. That could mean recession, volatility and ultimately a downturn for equity markets in the next 18-24 months. What’s more, investors are confronted by some unusual geopolitical and socioeconomic factors that are shaping markets and business prosperity. For UK investors, Brexit is at the top of the list; while Trump’s tenure as President of the USA has indelibly shaped global economics with (at least) two years to go. Digital disruptors and Europe’s political turbulence are also forces at play as we enter 2019. The complexity and inherent uncertainty of these factors makes it difficult to say with any real conviction how markets are likely to develop over the next 18 months or so. At Henderson Alternative Strategies Trust (HAST), we have been gradually reducing the portfolio’s riskier positions in anticipation of a downturn and October’s sell-off was a comforting nod to the team’s efforts. Encouraging signs October may have been a sign of things to come with increased volatility typical of the latter stages of the business cycle. The FTSE World Index, which HAST aims to outperform over the long-term, returned -5.5% during the month. The Trust returned -2.2%, which means it outperformed the benchmark by 3.3% (source: Bloomberg) during a tough month for global investment markets. The Trust’s NAV was also less sensitive to the late January/early February sell-off in global equity markets. This is encouraging in the sense that we have built the portfolio to be less correlated with mainstream equity and bond markets over recent years; and we have proactively reduced the portfolio’s exposure to riskier assets (risk-off). It gives us some confidence that we are moving in the right direction and – if tough times are indeed ahead – we can whether the storm and keep our shareholders happy. Reorienting the portfolio to a ‘risk-off’ position has been a gradual process, but now we are close to where we want to be. We have divided the portfolio into six distinct categories: hedge funds (23.7% as at 21st November), private equity(29.6%), listed equity(15.4%), property(12.2%), commodities(4.0%) and credit(11.1%); and this helps us navigate away from the mainstream markets and aim to deliver uncorrelated returns for our shareholders, which we believe will be resilient during challenging periods. Hedge funds We took the opportunity during October’s sell-off to top up a few of our hedge fund positions with the sector taking a heavy beating during the month. Our largest hedge fund holding is in Blackrock European Hedge Fund. The fund takes both long and short positions to invest in the public equity markets of Europe. It invests in stocks of companies operating across diversified sectors and invests across all market capitalisations, with the primary aim of maximising total returns. We like the fund’s flexibility and the management team is very skilled, hence our confidence in the fund’s ability to deliver attractive returns. After a stellar 2017, European equities are once more out of favour with global investors, but we think the fundamentals for growth in Europe remain intact. There are some political concerns across the region, but value has returned to the continent and we believe it’s a strong diversifier to the US’ long-running bull market. Private equity Private equity has traditionally formed a key part of the Trust’s strategy and we have been pleased with the segment’s performance this year. One pick from the private equity sleeve of the portfolio is Mantra Investment Partners’ Mantra Special Opportunities Fund, also one of the Trust’s largest holdings. The fund invests in a broad range of private equity businesses and we like it because it buys these businesses at significant discounts to net asset value. Mantra is able to do this because it acts as a liquidity provider for investors in private investments that are seeking an exit of what is usually a small holding for them. Mantra is small in size and is nimble as a result, picking up small positions at large discounts and then seeking an exit. It has executed the strategy very successfully to date. Listed equity Burford Capital was one of two new positions added during October and it is one we are very keen on. We have undertaken significant work looking into litigation finance as an emerging asset class. The market sell-off in early October provided a good entry point for us to open a position in Burford, which suffered as did many small and medium-sized high growth businesses during the month. However, we see litigation finance as an uncorrelated asset class generating high returns, a very underpenetrated market with significant barriers to entry. Burford is undoubtedly the leading litigation financier and we were able to open a position at an attractive level as the stock fell 23.5%, peak to trough in October.