Alternative investments offer good route to growth

investors should look to hold up to 20% in alternatives

Investors should consider allocating up to 20% of their portfolios to alternative investments, including hedge funds, according to a leading private wealth management expert, speaking in April at Banque Privée Edmond de Rothschild Europe's conference in Italy.

David Darst, chief investment officer at Morgan Stanley Private Wealth Management, said the full 20% could be considered in a scenario of moderate growth and inflation and if the oil price sits at about $26.23 per barrel. If oil falls to about $21.22, and there is some inflation and healthy growth, the allocation to alternatives could be reduced to 15%, with equities increased from 45% to 50% of the portfolio, and bonds reduced by five percentage points to 25%.

Darst said the allocation could prove useful if markets fall further. 'The Nasdaq has fallen from 5,048 in March 2000 to about 1,434 now,' he said. 'But I am surprised it has not fallen more.'

He said profit margins from many big US firms in the first quarter had come from cost cutting and appeared healthy when measured against year-earlier figures. Darst added: 'But they are saying, 'we still cannot give you any good news about the third and fourth quarters this year.''

However, Ernest Boles, managing director of Morgan Stanley's Private Wealth Management division, said the remaining regulatory, tax and market issues around the delivery of hedge funds in Europe had a 'chilling effect on the actual use of hedge funds.'

Boles said one way of delivering hedged products into France was via life insurance capitalisation contracts, but he did not recommend investing more than 30% of the life insurance contract in alternative products, listed in OECD jurisdictions and offering monthly or better liquidity.

'Life insurance gives you the benefit of rolling up income and gains and compounding them tax free inside the structure,' Boles added.