Turning the Investment Odds in Your Favor

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• Traditional portfolios face challenges, making it crucial to "play the odds" by seeking small, repeatable edges instead of chasing big wins.
• Institutions focus on resilience and risk-adjusted returns, while HNWIs favor instinctive, story-driven decisions. Alternatives should be a core allocation in uncertain markets.
• Private credit and specialty finance offer more access to institutional-style opportunities, but investors must watch for risks like "volatility laundering.

As interest rates climb and volatility returns, the traditional 60/40 portfolio is being challenged like never before. This new era of alternative investments requires a sharper focus on risk, edge, and adaptability—the principles top investors use to stay ahead.

"As a backgammon player or a poker player, that's the mentality you have. You're playing the odds and trying to put the odds in your favor on every move or time you're playing," explains Alexander de Bruin, Head of Fund Research at Edmond de Rothschild Group.

Alexander brings a rare combination of experience to the alternative investing world. A former floor trader turned allocator, he has spent decades managing money in U.S. and European markets. His deep understanding of both sides of the investment equation gives him a unique edge in assessing opportunities and risks.

"Playing the odds": A statistical approach

Alexander's philosophy is built on the principle of "playing the odds"—a core concept from games of chance that extends far beyond the casino table. For alternative investments, this approach provides a structured decision-making framework.

Instead of chasing outsized wins, Alexander believes in consistent, repeatable gains. “We're not looking for guys who can hit the ball out of the ballpark every time," he explains. “We're looking for guys who just incrementally have some kind of edge.” This means identifying small, sustainable advantages rather than attempting to time markets or make perfect predictions.

Success is about consistently positioning yourself in high-probability scenarios. This involves making diversified, well-structured investments that can absorb losses while capitalizing on long-term opportunities.

From trading floors to allocation

Alexander began his career as an options trader in Philadelphia, where he gained a deep understanding of market mechanics and the importance of edge—the small but repeatable advantages that separate skilled investors from the rest.

"We want to be involved in markets where there's edge," he explains. Unlike theoretical knowledge, edge is developed by actively participating in markets, absorbing real-world data, and understanding how strategies work.

This isn't just about arbitrage opportunities or exploiting inefficiencies. It’s about recognizing deeper market forces that drive price movements and knowing where imbalances create opportunities. His experience trading convertible arbitrage was particularly formative, exposing him to equities, options, credit spreads, and interest rate swaps—all of which shaped his understanding of risk and return across multiple asset classes.

But finding an edge is not enough—investors must understand why it exists, why it works, and whether it is sustainable. Markets evolve, and edges disappear over time as competition increases and inefficiencies are arbitraged away.

Institutional vs. high-net-worth

Alexander highlights the distinct ways institutions and high-net-worth individuals (HNWIs) think about alternative investments. While both groups are drawn to hedge funds and private markets, their motivations and expectations differ significantly, shaping how allocators tailor their strategies.

"Institutions are much clearer about their objectives," he explains. Rather than chasing returns, they seek investments that reduce portfolio correlation, constructing resilient allocations designed to absorb market shocks. They prioritize clear benchmarks, risk-adjusted returns, and long-term stability.

By contrast, HNWIs often approach investing with a more personal, instinctive mindset. “They’re a little bit more into the story and more instinctive about the portfolio,” he notes. Some prefer to cherry-pick individual managers, while others favor hands-off strategies like funds of funds.

Recognizing these differences is crucial. Alexander emphasizes the importance of a foundational question: “How does this fit into your larger portfolio, and how does it align with your long-term goals?” This question shapes portfolio construction, ensuring investments align with risk tolerance, return expectations, and decision-making style.

Why now is the time for alternatives

Low interest rates and low volatility created a challenging environment for many alternative asset classes, particularly hedge funds. But that era is over. With inflation rising, interest rates increasing, and macroeconomic uncertainty returning, we enter a landscape favoring alternative investments. "The higher rate environment is positive for alternatives," Alexander explains, noting that increased volatility and higher rates serve as powerful return drivers for many hedge fund strategies.

This environment is primed for a wider dispersion of returns across asset classes, sectors, and individual instruments. In other words, the gap between winning and losing trades is growing, creating more opportunities for hedge funds to capitalize on market inefficiencies. He highlights the potential for volatility in equities, FX, credit spreads, and capital structures, all of which present compelling opportunities for strategies that thrive on dislocation.

Despite the volatile market, many investors still heavily invest in traditional long-only positions. Alexander finds this puzzling, as he believes equities and traditional investments aren't bad, but blindly holding long positions exposes investors to unnecessary risk.

Multi-manager funds: Core allocation or a crowding risk?

Multi-manager hedge funds have become dominant players in alternative investments, with the largest firms now managing hundreds of billions in assets. They have transformed the industry by offering diversification, access to a broad array of managers, and active allocation.

As Alexander explains, "They get access to more managers, and they can also reallocate on a much quicker time basis and put their stop losses in for certain strategies or managers." This flexibility allows multi-manager hedge funds to adapt quickly, making them a compelling choice for investors.

However, their growth and success have introduced new challenges. Liquidity constraints have emerged as redemption restrictions have increased with fund size. More significantly, when these large funds adjust their portfolios, their size can impact markets. The rapid reallocation of capital can create market turbulence if many firms unwind positions simultaneously. "It's like flying behind a jet, right? And the turbulence from that wind can be massive," Alexander warns. While multi-strategy hedge funds often employ sophisticated risk management processes, these measures can sometimes transfer risks from within the fund to the broader market, amplifying volatility in stressed conditions.

For investors concerned with these liquidity risks and market impact, quant multi-manager strategies present an alternative with similar diversification benefits but relatively better liquidity.

The democratization of private markets

Private markets are no longer exclusive to institutions. New investment structures allow high-net-worth individuals to access opportunities traditionally reserved for pension funds, endowments, and sovereign wealth funds.

Alexander attributes this shift to the "disintermediation" of banks, which has opened up direct lending and private investment opportunities. The rise of evergreen structures has further expanded access, allowing investors to participate in private assets with periodic liquidity rather than long lock-ups.

However, these innovations bring risks that demand careful scrutiny. Alexander warns of “volatility laundering”—where infrequent price discovery creates an illusion of stability, masking the true risks of these investments. Rigorous due diligence is essential to ensure valuations accurately reflect market realities.

Despite these concerns, Alexander remains bullish on private markets—particularly specialty finance and private debt, which offer higher yields and shorter durations than traditional private equity.

Navigating alternative investments with precision

As markets evolve, successful alternative investment strategies will become more sophisticated and data-driven. Alexander anticipates growing opportunities at the intersection of technology and market structure, from machine learning in systematic trading to blockchain innovations in private markets.

But the core principles remain unchanged: understanding edge, managing risk, and maintaining discipline in portfolio construction. As Alexander’s career demonstrates, the best investors combine timeless principles with adaptability to shifting market conditions.

For today's investors, the message is clear: Alternative investments are no longer "alternative"—they are an essential tool for building resilient portfolios.

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This is based on an episode of Top Traders Unplugged, a bi-weekly podcast with the most interesting and experienced investors, economists, traders and thought leaders in the world. Sign up to our Newsletter or Subscribe on your preferred podcast platform so that you don’t miss out on future episodes.