Another example is open-ended commercial property funds. These are strategies which can appear to have low volatility.
But when Brexit and then the Covid crisis forced those funds to shut to investors wishing to withdraw their cash, the risks became all too apparent.
The alternative asset class preferred by Mr Coombs is gold, as he believes investors will have to deal with deflation in the years to come, and gold is an effective investment in that climate.
He has also used derivatives, specifically those that protect his funds from future falls in the US equity market in exchange for a small payment from current returns.
This works in a similar way to an insurance policy and helps smooth out returns over the longer-term.
Not all agree. Stephen Hay, multi-asset fund manager at Baillie Gifford, prefers not to invest in derivatives as he believes they are instruments ultimately linked to the returns of a particular asset class, and so are not really diversifiers.
Opportunities in alternatives
Dean Cheeseman, multi-asset investor at Janus Henderson, is keen on alternative assets, but believes investors can sometimes be too blasé. While volatility is usually short-term in nature, extreme volatility can quickly turn into a permanent loss of capital .
Mr Cheeseman says: “A “properly” diversified portfolio that includes alternative assets should help dampen volatility. Alternatives represent a wide array of investments available, but not all of them share common characteristics or achieve a goal of dampening volatility. What defines an asset as “alternative” is exhibiting different return drivers and income streams from traditional equities and bonds, while also offering lower correlation with the primary two asset classes.
"Gold is an example of a commonly used alternative asset, but it can itself experience elevated volatility at times which may not necessarily suit all types of investment mandates. However, it tends to be a good hedge and a diversifier and is often used in multi-asset portfolios; recently it has been supported by a weakening US dollar.
"Investors should avoid alternative investments which do not provide enough diversification, ie have high correlation to stocks and bonds, as well as those strategies with exposure to low-quality assets, high leverage and insufficient liquidity.”
More esoteric options are also available. Gary Potter, who jointly runs about £2.5bn of assets across a range of ten multi-manager funds at BMO Asset Management, has investments in assets such as UK caravan parks, which he says perform in a way that is not reliant on the wider economy, and so are alternative assets.
