The growth in alternative asset classes, particularly private credit, is reshaping portfolio construction while also raising important questions around governance, transparency and fitness-for-purpose. That’s the view of Chetan Trehan, sector head at SQM Research.
Trehan, who oversees alternative fund ratings at SQM, highlights that while the category remains broad, encompassing everything from private equity to hedge funds, gold and even Bitcoin, it is private credit that has emerged as the standout growth area. “Our coverage of that sector has increased quite a lot,” he says. “But we’re also slightly cautious… about six months ago, we put the sector on watch because of transparency and governance issues.”
That caution reflects growing industry concern. Several high-profile blow-ups have brought alternative debt strategies under the microscope. Trehan notes that while private credit has appeal as part of fixed income allocations, its risk characteristics and structural differences demand deeper analysis. “We’re trying to get through what are the different characteristics within that sector, which are different to other parts of fixed income or the traditional asset classes,” he says.
Private equity, by contrast, appears less volatile from a research perspective, but coverage and demand remain steady rather than explosive. Trehan explains that private equity is still regarded as a core alternatives exposure. “I would definitely allocate to that,” he says, adding that it is not just about alpha generation but also about the absolute return profile. “Whether it’s a hedge fund or a gold fund, you’ve got to look at what happens when equities correct by 20 per cent or 30 per cent. What will this part of the portfolio do?”
One of the challenges Trehan highlights is how alternatives fit into different portfolio structures. Managed accounts, particularly SMAs, have been slower to adopt alternatives compared to traditional unitised vehicles. “Traditionally, Balanced and Growth funds have allocated a reasonable amount to alternatives, and they should, but in the SMA structure, not so much,” he says. “That’s a conversation that’s happening with fund managers right now.”
Part of the challenge is logistical. Alternatives often come with liquidity constraints, complex pricing or non-standardised reporting, which makes them difficult to implement within the rigid framework of SMAs. But Trehan believes this is a problem that can and should be solved. “It’s about allocating to the appropriate fund managers,” he says. “You’ve got to understand if there’s a good track record.”
Direct property and infrastructure also receive a nod from Trehan as under-utilised tools in portfolio diversification. While Australians tend to be heavily exposed to residential property, Trehan argues that professionally managed unlisted property should not be overlooked. “It’s a good asset class to invest in,” he says. “Not just listed, but unlisted, direct property, or infrastructure, for that matter.”
Gold continues to play a role in alternatives coverage at SQM, and while it lacks the narrative excitement of emerging crypto strategies, it serves an enduring purpose. As Trehan puts it, the focus across all alternatives should be on their correlation to core markets and their ability to deliver absolute return when risk assets falter. “It’s not just about alpha,” he says again. “It’s about what that allocation does when the rest of the market is under pressure.”
With the alternative universe becoming increasingly crowded, and definitions increasingly loose, Trehan’s final message is one of discernment. “We’re agnostic about where the money goes,” he says. “We don’t manage money. But our job is to shine a light on what’s inside these strategies, and ensure advisers and allocators know what they’re getting into.”