UBS is advising investors to boost allocations to alternative assets as a way to contend with rising market volatility and heightened geopolitical risks. The bank pointed to hedge funds, private markets and infrastructure as primary diversifiers that could help portfolios in the current environment.
UBS said the end of a rate-cut cycle, together with increasing global debt levels, strengthens the argument for alternatives. According to the bank, these strategies can introduce fresh sources of return and potentially lower portfolio-level risk.
On hedge funds, UBS emphasized several strategy types it views as particularly attractive. The bank noted that global macro strategies have historically performed well during geopolitical crises, delivering equity-like returns but with meaningfully lower volatility and smaller drawdowns. UBS also highlighted equity market neutral and multi-strategy funds as flexible approaches able to generate returns across rising and falling markets.
"In our view, hedge fund strategies like discretionary macro, equity market neutral, and multi-strategy platforms are well placed to earn returns amid volatility," analysts at UBS said.
Within private markets, UBS said it remains constructive on private equity, citing improving deal activity, stronger exit trends and what it described as a more favorable macro backdrop. The bank expressed a preference for value-oriented buyouts and secondary transactions, suggesting these segments may be less vulnerable to sector-specific swings.
UBS urged a more cautious approach to direct lending. The bank warned that default risks are rising in lower-tier segments and advised investors to emphasize higher-quality borrowers when considering direct lending exposure.
Infrastructure and real estate were identified as potential long-term diversifiers. UBS said infrastructure assets can offer stable, inflation-linked cash flows, while real estate returns in the present environment are likely to be driven more by income than by capital appreciation. The bank described these asset classes as complementary to other alternative strategies.
At the same time, UBS cautioned that alternatives carry their own set of challenges. The bank pointed out risks such as illiquidity, higher fees and reduced transparency compared with traditional public market investments. Investors, UBS said, should weigh these trade-offs when considering increased allocations to alternatives.
Bottom line: UBS recommends expanding exposure to alternatives - including hedge funds, private equity, infrastructure and real estate - as a hedge against volatility and geopolitical uncertainty, while remaining mindful of liquidity, fee and transparency risks.