Capital-Efficient Strategies: Tackling the Challenges of Low Prospective Returns
A pragmatic implementation of investment leverage seeks to enhance alpha and diversification.
- Many investors seek ambitious annual return targets – often as high as 7%. Yet with valuations stretched for both equities and bonds, standard portfolio allocations seem unlikely to deliver what’s needed.
- This has led some investors to reach for more returns by reducing exposure to less risky but lower-returning assets and leaning instead into riskier, higher-returning assets.
- Yet shunning diversification and increasing exposure to procyclical assets with embedded leverage is a risky way to tackle the prospect of lower returns. Thus, growing numbers of institutional investors are pursuing an alternative approach that uses capital-efficient strategies.
- These entail direct and more efficient uses of leverage to gain exposure to assets that may improve portfolio returns without a material increase in portfolio risk.