Alternatives are back for private clients: UBS WM

UBS Wealth Management is repositioning its alternatives offering in response to rising demand at a time of no clear directional market trend, its global head of investment funds, Rene Buehlmann, tells AsianInvestor.

“Alternatives are back and they will continue to see a rebound [in private client portfolios] in the coming months and years,” he forecasts.

The starting point for the firm is the alternatives platform of the Swiss bank’s global asset management business, namely Alternative & Quantitative Investments (A&Q). Through this it provides clients access to a range of hedge funds. As of the second quarter this year A&Q had SFr29 billion ($31 billion), or 5% of UBS Global AM's SFr586 billion under management.

But while the technology is there, there has not been demand from private clients for such solutions in the aftermath of the collapse of Lehman Brothers in September 2008.

But Buehlmann confirms that UBS Wealth Management has started to see positive net inflows this year into alternative solutions from wealthy Asian clients. Appetite has been strongest for relative value and equity long-short funds, while interest in private equity is also reviving among high-net-worth individuals.

The firm is advising clients to invest up to 20% of their portfolio in alternatives subject to client size, sophistication and risk profile. For smaller clients it recommends a fund of funds approach for both hedge funds and private equity.

“That [20%] is quite a strong commitment, but it is one of our key focuses for next year – to rebrand and reposition alternatives for clients,” says Buehlmann.

“It [alternatives] is definitely something that clients should look at. I think we need to do a better job of highlighting the opportunities and benefits [of alternative exposure], such as better risk-adjusted returns over a longer investment horizon.”

Part of the renewed appetite for alternative solutions, he acknowledges, is a realisation among clients that the 30-year bull market for bonds has come to an end.

The future of fixed income is one of the key themes that UBS Wealth Management is talking to clients about now, a potential pull factor towards alternative solutions.

Buehlmann notes he has seen a repositioning within fixed income among clients, with significant flows into short-duration products, duration-neutral and floating rates.

The predominance of home bias in Asian client portfolios is another topic. Buehlmann notes that UBS is trialing an approach by studying how clients risk-return profile changes as global exposure is added to their traditional home bias.

“If you stayed invested in Asia over the last 10 years, you would have had decent returns,” he notes. “But if you have 50% home bias and 50% global exposure you had almost the same return with significantly less risk and volatility. Risk-return should be a topic and I don’t think clients realise that, so there needs to be education.”

He notes that volatility- and risk-adjusted returns is something private clients are more receptive to now, based on the fact they are uncomfortable with the state of the markets.

But liquidity is a factor. “If you want to be more creative and find ways to manage volatility, you need to give up a bit of liquidity and clients are not receptive to that. So it’s a tough challenge.”

He notes that UBS has seen some success selling a distressed mortgage loan offering for the US housing market. “Why? Because we shortened the tenor to five years, from seven- to 10-years,” he says, evidence that liquidity is on clients' minds.

Buehlmann urges asset management companies to consider how best to position the benefits of diversification when it comes to promoting their fund solutions. He points to the benefits of a Ucits-regulated offering as bringing more oversight and liquidity to clients, and reckons fund houses need to talk up these benefits more.

“If you manage to come up with ideas and positioning that entices local investors to diversify and can credibly demonstrate the benefits, that to me is an opportunity,” he says.

“As an industry we need to get clients into more globally diversified product. Some fund managers are a bit more successful at this than others.”

As of the second quarter this year, UBS Wealth Management had SFr210 billion in Asia-Pacific invested assets.