Traditional balanced portfolios have underperformed so far in 2022. In that light, the top of UBP’s agenda is rebalancing and substantially de-risking clients’ portfolios, and increasing allocation into alternatives.

“For us, alternative investments have always been part of our DNA, and these strategies are not new. We have a really well-established team covering both hedge funds and private markets, and they work to source all our investment opportunities in this space,” Edouard Hoepffner, head of investment services, Asia told Asian Private Banker.

Many of UBP’s clients in Asia have, in fact, been building their alternatives allocations  for a number of years, he said. However, there has been a large uptick in interest, as more clients are keen to hear about and increase their allocation to alternative strategies even if they are less liquid. Hoepffner declined to comment on its current penetration into alternatives, but said a large part of new inflows this year has come from the broad alternatives segment as well as structured products and FX.

“To match the growing demand, we have a strong pipeline of planned opportunities for launch, both in hedge funds – long-short credit, global macro, and in private markets – real estate or pre-IPO,” he said.

Pushing alternatives

As a high conviction call from its CIO office, UBP takes two approaches to its hedge fund exposure. The first involves substituting long-only exposure, on both the equity and fixed income sides.

“We were successful in doing this late last year and early this year by using baskets of liquid strategies aimed at providing some downside protection while maintaining an element of upside capture. For example, we have used clusters of equity long-short funds to substitute some long-only equity exposure to provide asymmetry,” he explained, adding that the bank did the same on the fixed income side by using long-short credit and other strategies.

The second is what UBP describes as diversifiers, including strategies such as global macro or CTA (commodity trading advisor), which have performed particularly well in the current environment.In private markets, UBP has been active on the real estate side as well as  investing in private debt or equity.  Hoepffner stressed that the bank not only  works with large managers, but also  with small and more specialised managers to source specific deals.

“This is a reflection of our focus on highly specific investment ideas which can be quite niche and require a real specialist expertise. For example, we offered some investment opportunities in the student housing sector in Europe and music royalties including a number of renowned performers.” The bank recently has also completed a private equity investment in the logistics sector in China with one of the strongest players in that sector.

Cautious on semi-liquid strategies

The emergence of semi-liquid strategies has also caught the eye of many U/HNWIs as well as  private banks, but UBP focuses more on seeking out “specific investment rationale rather than focusing on the liquidity terms”.

“Earlier this year, we added one private credit strategy that is semi-liquid. However, this will not be a key priority area for us,” he added. “While we will likely add a few more such strategies in the future, we are also particularly conscious of possible liquidity mismatch.”

Large inflows are going into these strategies at the moment, which ensures that the semi-liquid mechanism works, Hoepffner said. He is concerned, however, that “when clients do need this liquidity, it is no longer available given most investors will likely require it at the same time”.

Difficult to find right solutions

Apart from alternative strategies, UBP is also looking at fixed income as the bank believes the asset class is starting to become increasingly attractive: “We foresee a large asset rotation towards fixed income instruments [in next year], after a few years of really difficult conditions for that asset class.”

The bank is staying cautious and selective on equities. Hoepffner pointed out that the bank will continue to focus on themes such as food inflation and the broad idea of security – food energy, manufacturing.

“These themes resonate well with our investors. However, it can be difficult to find the right route to market for such opportunities, so we tend to develop our own products.”

UBP expects China to slowly become more attractive as it embarks upon more easing as opposed to the tightening taking place in developed markets.

The bank is selective about  sectors in China that it invests,  preferring to stick to those the central government highlighted in its latest five-year plan: electric vehicles & batteries, renewable energy, local consumption, digitalisation and smart cities.

“However, it can be tricky to find the right products to invest into these themes. This is particularly true when looking for a highly specific exposure onshore, often in the mid-cap sector. This is why we continue to build our own expertise and craft our own products.”