Last time I discussed the merits of simple, diversified lazy portfolios. The idea is to cut costs and make life simple in a core portfolio of 10-12 funds. Most of the time that means investing in low-cost, index-tracking exchange-traded funds (ETFs), but I also pointed out that you could run a similar exercise with actively managed investment trusts.

In fact, I would go further and say that if you want a more alternative portfolio of slightly unconventional strategies, you probably have no choice but to use actively managed investment companies.

It’s worth explaining again why seeking out alternative ideas and strategies makes sense. Since the rise of quantitative easing (aka central bank money printing), pretty much all classic risk assets such as corporate bonds and most equities have moved in step with each other. In technical parlance, they are closely correlated.

That was great while the bull market lasted but as soon as all that excess liquidity started draining from the system alongside increased interest rates, those risk assets started selling off – as one, moving downwards in tandem. Thus, the classic 60/40 split of portfolios holding lots of global equities and corporate bonds hit a wall and underperformed as did many government securities.

No real estate

One immediate caution about my Alternatives Lazy Portfolio: since all the funds listed below trade on a stock exchange, there is always a risk that they could get caught up in a massive market sell-off. That has an impact on the overall asset class selection because I have excluded real estate investment trusts (Reits) because in my experience they look and behave like traditional equities.

Where appropriate, I’ve also sought out funds that pay an income but it’s not the primary outcome. As for selecting the actual funds and managers I have stuck to a very simple principle which is to look for the largest, most liquid and best performing funds in that space.

Crucially I have attached some weights in the model portfolio to the separate strategies or niches. I have attached a 20% allocation to hedge funds that provide a diversified, market-neutral return. There’s no great magic to that number – it feels like an appropriate allocation, and I suspect more cautious investors might allocate a higher percentage.

I would like to include a handful of easy-to-access funds, but in truth there is only one scale player with a great track record and that’s BH Macro (BHMG ).

I have also allocated 20% to pure commodity exposure. I would love to pick an actively managed fund but there isn’t one accessible to private investors, so I have included a successful ETF from Legal & General Investment Management. I accept that many investors hate investing in pure commodities – as opposed to say commodity equities, where the market risk is much higher – because they think it’s ultimately a futile pursuit seeking long-term gains. If you are of that view, then I suspect you’ll allocate much less than 20% to this asset class.

Big is perhaps best

Once we are past these two 20% allocations, we get to the core pursuit – actively managed alternative investment trusts. In this big bucket of strategies and ideas we face a crucial decision: how to allocate between the various niches ranging from large private equity firms through to specialist infrastructure debt.

Again I’ve taken a very simplistic and lazy approach – total market value as an indicator. Adding up all the niches we get to a total £57bn in value for mainstream listed alternative funds which I then divide into broad sub-categories using data from analysts at Numis. I then simply pick the biggest, most established fund player in each subcategory to build up the portfolio.

We can see how this works in private equity which is the dominant subcategory within this listed alternatives universe. Overall, PE funds account for £31bn of that £57bn which I think is reflective of the power and dominance of private equity as an asset class.

Within PE I have further divided into three niches – single PE funds where I have chosen the obvious star of the sector, 3i Group (III ), alongside fund of funds and lastly what’s called growth capital or venture capital. In each subcategory, I have, as I said before, chosen the dominant player which is usually also the easiest to trade and access. I’m not for one moment saying the chosen funds are the very best in performance, or the very cheapest or the highest income payers – I’m simply, lazily, saying these are the players to which the market prefers to allocate capital.

At the end of this process, we end up with nine funds and nine subcategories which I think are a fair reflection of how investors allocate their capital to alternative investments. In most cases, I have also suggested an alternative fund which I accept makes the grade, but I haven’t included it in my simple, lazy nine-fund model portfolio. In two specific categories – core traditional infrastructure as well as renewables – I have presented an either-or choice.

Alternatives Lazy Portfolio

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Asset class	% of model portfolio	Fund	Alternative
Diversified Commodities	20%	L&G Multi-Strategy Enhanced Commodities Ucits ETF
Core infrastructure	9%	HICL Infrastructure (HICL ) or International Public Partnerships (INPP )	BBGI Global (BBGI)
Renewable Infrastructure	12%	Renewables Infrastructure Group (TRIG ) or Greencoat UK Wind (UKW )
Private Equity: Direct	20%	3i Group (III )	HgCapital (HGT )
Private Equity: Fund of Funds	10%	HarbourVest Global Private Equity (HVPE )	Pantheon International (PIN )
Private Equity: Growth Capital	3%	Molten Ventures (GROW)	Chrysalis Investments (CHRY )
Lending and Structured Finance	3%	BioPharma Credit (BPCR )	TwentyFour Income (TFIF )
Infrastructure Debt	3%	Sequoia Economic Infrastructure (SEQI )	GCP Infrastructure (GCP )

The more adventurous among you might notice I have left out some themes and categories that have been commanding a great deal of attention such as energy efficiency or music royalties (the subject of next week’s column).

I have done this because there’s a whole legion of really interesting alternative strategies which I think are indeed very compelling but just aren’t quite established enough yet for my Alternatives Lazy portfolio. Most are income-focused and their shares trade on discounts below their net asset values after last year’s surge in government bond yields and interest rates.

Interesting newcomers

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Asset Class	Fund
Energy Infrastructure (MLPs or master limited partnerships)	Invesco Morningstar US Energy Infrastructure MLP Ucits ETF
Music Royalties	Hipgnosis Songs (SONG ), Round Hill Music Royalty (RHM )
Shipping	Taylor Maritime Investments (TMI ), Tufton Oceanic (SHIP )
Timber	Foresight Sustainable Forestry (FSF )
Energy Storage, Energy Efficiency	Gresham House Energy Storage (GRID ), SDCL Energy Efficiency Income (SEIT )
Digital Infrastructure	Digital 9 Infrastructure (D9I9 ), Cordiant Digital Infrastructure (CORD )

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