Alternative assets should soon come back onto the radars of institutional investors, says BlackRock, despite problems experienced in 2008.

Theis asset class, BlackRock said, has had a better 2009 although some asset types remain in negative territory. Distressed debt and new private equity funds are attractive options, and pension funds should be considering the allocation of up to 25 per cent of their non-bond assets to alternatives. This, BlackRock said, offers diversification and helps to enhance long-term returns and reduces volatility.

The firm's research shows that an allocation of 25 per cent of a global equity portfolio to a diversified basket of alternative assets between January 1990 and December 2008 reduced annual volatility from 18 per cent to 16 per cent, with an average return increased by 0.6 per cent.

Ewen Cameron Watt, managing director in BlackRock's multi-asset portfolio strategy team, said: "Valuations of alternative assets fell hard last year. Investing in alternatives at such points in history has tended to produce strong 'vintage' year returns in the long run, and with current valuations, leverage isn't as necessary to achieve strong returns.
"But alternative assets cannot be left to a buy-and-hold-strategy. Managing an alternatives portfolio needs skill, understanding of the underlying asset classes and an ability to read the timing of the wider market. For example, UK real estate was one of the best performing asset classes in 2001, 2004 and 2006, but the worst performing in 2007. Commodities performed strongly in 2007, which followed a year - 2006 - when they were the worst performer."

The next 12 months are projected to offer significant opportunities in alternatives, particularly when it comes to long-term investors. However, investors must take note of the lessons learned last year and employ rigorous risk management and ongoing governance of alternatives.

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