Uncorrelated Alternatives

Description

We define uncorrelated alternative investments (or “alternative alternatives”) as investments that do not have traditional risk betas. These are investments where the underlying risks are uncorrelated, or less correlated, both with traditional equity and fixed income returns, and also returns from alternative asset classes such as private equity, real estate or hedge funds. Most asset classes are still closely linked to the business cycle and the performance of public markets, and thus alternative alternatives can offer significant diversification benefits. We do not consider them as a separate asset class as the investments are often structurally similar to other asset classes, despite having different key drivers. Importantly we focus on structure where we can identify a clear contractual return, avoiding strategies that require an equity exit or a third party buyer for monetisation.

Alternative alternatives encompass a wide range of strategies but can be broadly categorised into a) investments which are dependent on uncorrelated events such as litigation funding, drug trial funding, appraisal rights, insurance or life settlements and b) investments which offer uncorrelated income streams such as royalties (drug, technology, or entertainment), leasing strategies and other lending strategies where the nature of the underlying collateral is uncorrelated. Although many consider antiques, art and vintage cars to be attractive alternative investments, relative to what we describe above, they are disadvantaged by their lack of income, economic utility and inconsistent valuation metrics.

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How We Invest

As the majority of uncorrelated alternative investments are in less scalable, often idiosyncratic asset classes, it is imperative to construct a diversified portfolio. We are focused on identifying best-in-class asset managers in many of these sectors and invest through a combination of commingled funds, separately managed accounts, bespoke joint ventures and co-investments. The majority of our private uncorrelated investments are held in our evergreen private debt vehicle, which includes both private debt and uncorrelated illiquid strategies. We also offer bespoke specialist mandates for larger clients.

Case Study

In 2022, Partners Capital anchored the second vintage of a litigation financing strategy that specialises in commercial, patent and pharmaceutical investments, having also anchored the manager’s first vintage. The fund will provide third-party financing to cover the cost of litigation or arbitration on behalf of claimants, in exchange for a pre-determined share of the proceeds upon a successful resolution of the case. This may include commercial litigation, arbitration, patent litigation, bankruptcy litigation, whistle-blower lawsuits, mass torts and shareholder class actions. The manager enjoys a comparative advantage over other litigation funders due to the team’s expertise in underwriting and sourcing niche, complex, legal processes in their chosen areas of expertise. Given our position as an anchor investor, Partners Capital clients benefit from preferential terms on their fund commitments.