Fidelity Institutional
May 19, 2023
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Demystifying the Alternative Investing Landscape

A Fidelity panel of alternative investment professionals share their knowledge on opportunities and risks in nontraditional asset classes within today's changing macroeconomic backdrop.

Commentary
Demystifying the Alternative
Investing Landscape
A Fidelity panel of alternative investment professionals
share their experience on opportunities and risks in
nontraditional asset classes within today’s changing
macroeconomic backdrop.
KEY TAKEAWAYS
Rising interest rates, higher inflation, global economic uncertainty, and heightened
market volatility have transformed the investment landscape, creating potential
opportunities for advisors and institutional investors considering alternative strategies.
But alternative markets encompass many complexities, requiring specialized
investment knowledge to navigate them successfully. A recent panel of Fidelity
alternative investment professionals shared their insight about current conditions
across private equity, private real estate, direct lending, and liquid alternatives.
Private equity continues to provide a key source of capital for business owners
and portfolio managers, while headwinds in the macro landscape have created
potential opportunities with lower valuations.
In private real estate, the shift in interest rates has led to materially lower activity,
but with significant capital on the sidelines due to dislocation or volatility, active
investors can take advantage of correcting values.
Given growth of direct lending and the unique potential benefits of equity-like
returns, floating rates, and lower volatility, the risk-return profile for the asset class
remains attractive.
Some liquid alternative strategies are well-positioned to benefit from higher
interest rates, and with low correlation to equities and bonds, may offer an
attractive option for investors.
Michael Bailey
Head of Private Multi-Strategy
Funds
Sladja Carton
Institutional Portfolio Manager
David Gaito
Head of Direct Lending
Ellen Hall
Head of Direct Real Estate
Mitch Livstone
CIO of Arbitrage and Hedging
Solutions
Demystifying the Alternative Investing Landscape
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2
Sources: World Bank, and WFE—The World Federation of Exchanges Ltd., 2021; Statista—NYSE/NASDAQ
Number of Listed Companies, https://www.statista.com/statistics/1277216/nyse-nasdaq-comparison-number-
listed-companies. As of Dec. 31, 2022. Number of companies from the Bureau of Labor Statistics, Distribution
of Private Sector Firms by Size Class, March 2021.
EXHIBIT 1: The number of publicly listed companies in the United States has declined
significantly in the last 25 years, with private equity today representing a broader
investment universe.
Number of Publicly Listed Companies in the United States
Introduction
As the economic backdrop shifts from the prolonged era of zero interest rates,
investors are exploring portfolio allocations using a new lens. In a changing
landscape of rising rates, inflationary pressures, and heightened market volatility,
the role of alternatives alongside more traditional asset classes may be top of mind.
Yet alternative markets have many complexities, requiring specialized investment
knowledge to navigate them successfully. In the roundtable discussion led by
Sladja Carton, institutional portfolio manager for alternatives at Fidelity, we explore
potential opportunities and considerations within private equity, direct lending,
real estate, and liquid alternatives.
Q: How is private equity activity impacted by headwinds in the macro environment,
including rising rates, higher inflation, and global economic uncertainty?
Michael Bailey:
In the years leading up to 2022, private equity deal activity
increased, with buying and selling of private equity-backed businesses at record
levels compared to prior years. And, over the past 25 years, the number of public
companies in the United States declined (Exhibit 1). So I think private equity will
continue to play an important role as an alternative to going public, or pursuing a
strategic mergers and acquisitions (M&A) solution, creating potential opportunities
for private-market investors.
8,090
4,891
4,000
5,000
6,000
7,000
8,000
9,000
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2 011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
3,000
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3
Conditions changed last year. Investors began to reassess macro risks,
putting downward pressure on valuations, and leading to a gap in
expectations between buyers and sellers. The impact of the market
headwinds has varied depending on the sector. Within the secondary
market (where investors buy and sell existing interests in private equity
funds) buyers may benefit from widening discounts, as limited partners
seek to rebalance portfolios that are overweight private assets.
Within the buyout segment, representing the acquisition of majority
stakes or full ownership in companies, we have been seeing lower
volumes of completed transactions. At the same time, transactions are at
more favorable valuations and higher levels of equity financing. In growth
equity, representing the acquisition of minority stakes in companies with
potential for accelerating earnings growth, investors increasingly prioritize
profitable growth, which is leading to fewer exits. In venture capital,
representing minority stakes in start-ups, valuations are sharply lower,
lengthening holding periods and causing companies to preserve cash.
Q: There is a lot in the news about the current dislocation in the
commercial real estate market. What are you seeing?
Ellen Hall:
We have seen an unprecedented shift in interest rates as
a result of the Federal Reserve’s action to tame inflation, which has
impacted borrowing rates, and as a result, deal flow. We have seen the
fastest and largest change in the federal funds rate since 1979–1981,
resulting in rising cap rates and falling market values.
In most cases, sellers have not been quite ready to accept the new
values. We have thus seen a period of “suspended disbelief,” where
deals are coming to market but not materializing as the buyer/seller
bid/ask spread has been too wide. Case in point: By most estimates,
transaction volume was down over 60% as of the end of 2022. However,
some of this mindset is abating as sellers are beginning to realize that
interest rates are unlikely to reverse to those historic lows.
We are seeing the most dislocation in the office segment, where
increasing vacancy rates, muted demand, and pullback by both equity
and debt sources are creating some distress. Those sellers who are in
the market—who have to sell either for liquidity or because of a loan
that might be coming due—are accepting the new pricing environment.
Completed deals have typically been those with attractive debt in place
or where there is a path to overcoming negative leverage due to built-in
rental growth, such as in the industrial and multi-family segments.
Private equity
transactions are at
more favorable
valuations and higher
levels of equity financing.
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Q: With the fall of Silicon Valley Bank, Credit Suisse and First Republic Bank,
banking market tightening may benefit direct lending. At the same time, large
investment banks are starting to allocate meaningful capital and also trade the
asset class. Is the banking market a headwind or a tailwind for direct lending?
David Gaito:
Really good question. From my seat, there is undoubtedly a tailwind.
The trends that catapulted private credit from a niche market to a $1.5 trillion asset
class have only gotten stronger with the volatility in the capital markets during 2022
and the stress in mid-sized banks during 2023.
There were 12,500 institutions and banks insured by the Federal Deposit Insurance
Corporation (FDIC) at the start of the 1990s, and by the end of 2022 that number
was just over 4,000.
1
Banks tend to get more conservative as they get larger due
to more scrutiny from regulators. The consolidation trend met head on with
bank regulation following the global financial crisis. There wasn’t necessarily one
regulation that led the way, but a combination of items along with a cultural shift
in regulatory oversight. One of the main goals was “derisking” banks, which meant
banks had to hold more capital and ultimately lend more conservatively. While this
may have been good for the risk profile of the banks, it left prospective borrowers
with fewer options. If you think about the last two months, I believe there will likely
be more bank consolidation and regulation. This could benefit direct lending.
I should note that I believe the asset class would have grown regardless of these
trends because of one concept: more predictable execution. While banking has
been volatile, direct lending has been more consistent given that it fills a key role in
the middle market. This asset class came into existence decades ago by providing
an alternative source of capital when banks or markets were not working properly.
People tend to forget that the banking market is fueled by the middle market
(representing companies with revenues in the range of $50 million to $1 billion)—a
key driver of the U.S. economy. There are only a little more than 4,000 public
companies, compared with 200,000 middle-market companies in the United States.
If you made the U.S. middle market its own economy, it would be the third largest
in the world.
If you are not familiar with the asset class, the risk-return profile may be surprising.
The reason is most owners and prospective owners of middle-market businesses
are willing to pay a premium to get more predictable financing and underwriting
processes. This includes a desire for their loans not to be traded, or the information
about their business shared more broadly. The best direct lending firms typically
operate in this matter and have exhibited good credit discipline overall and as a
result, the liquidity premium has held up (that is, the spread between liquid loans
and the high yield markets has remained healthy). This has resulted in a strong
tailwind, in our view, which should continue.
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Q: How does the debt ceiling limit and the recent banking crisis impact the
markets more broadly, and what opportunities and challenges are being
created for liquid alternative strategies? How are managers using derivatives,
such as options, to hedge and/or seek alpha in the current volatile markets?
Mitch Livstone:
The banking stress is really a symptom of the abrupt
departure from the Fed’s zero interest rate policy, which has caused longer-
duration assets on bank balance sheets to lose substantial value. (Duration
is a measure of interest rate risk). It has made the entire banking system
very vulnerable to deposit outflows, and we have seen some results of this
with Silicon Valley Bank, as well as Signature Bank, and more recently First
Republic Bank.
The banking crisis also exacerbates the debt ceiling issues. The banking
crisis has forced the Treasury to backstop deposits, which reduces the
Treasury General Account (TGA) and brings forward the date when the U.S.
Government runs out of money and hits the debt ceiling limit. All of this
creates more uncertainty and higher risk in the system, and generally, that risk
doesn’t get priced in the same way across different assets. This ultimately may
create some opportunities for liquid alternative strategies. Actively managed
strategies that are dynamic and responsive may be particularly well qualified
to handle these types of unpredictable markets. Many of them use options
and other derivatives for hedging risk and to derive alpha.
The derivatives market has evolved greatly over the last 10 years. In listed
options alone, we have added monthly, weekly and even daily expirations
and a wide range of strike prices in the S&P 500® as well other indexes and
ETFs. This has allowed asset managers to create more customized investment
strategies for client portfolios. With the evolution of the options and futures
markets we have seen their increased usage and a proliferation of derivatives-
based products, such as hedged equity, tail risk hedging, call write and put
write strategies, in addition to their continued use in diversifying strategies
such as global macro and systematic commodity trading advisor (CTA)
managed futures strategies. The volume explosion in short-dated options has
some market participants worried about the potential for increased market
volatility, but higher volatility may also create more opportunities for liquid
alternatives managers.
CTA strategy returns in
2022, demonstrating
strong performance
by uncorrelated liquid
alternatives
20.1%
Source: Societe General (SG)
Prime Services. See Exhibit 4.
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Q: Taking into account the variables that Mitch discussed, is this still a good time
to invest in direct real estate?
Ellen Hall:
I think it’s a great time to invest. A lot of capital is on the sidelines due to
dislocation/volatility, so if investors are active, they may be able to take advantage
of correcting values. We’re finally seeing deals completed at values below
replacement cost. A handful of segments are facing challenges, such as offices
and regional malls. With those few exceptions, fundamentals in other sectors have
remained strong. Additionally, the current environment is favorable given how real
estate typically responds in periods of inflation (Exhibit 2). Direct real estate can be
a potential hedge given the ability to frequently raise rents on short leases or with
the built-in rent escalations in longer leases. Also, higher cost of labor, capital, land
and materials have led to lower supply, which drives demand for existing buildings.
Finally, direct real estate can potentially offer attractive diversification given the
asset class has historically had a lower correlation to more volatile public markets.
Past performance is no guarantee of future results.
Not meant to imply the past or future performance of any
investment. Sources: Private Real Estate: National Council of Real Estate Investment Fiduciaries NFI-ODCE Index
(NCREIF), Public REITs: FTSE NAREIT All Equity REIT Index, Equities: S&P 500 Index, Fixed Income: Bloomberg U.S.
Aggregate Bond Index, 10-Year U.S. Treasuries: NYSE 10 Year Treasury Total Return Index. See endnotes for index
definitions. Inflation categorization by Fidelity based on data from the Bureau of Labor Statistics.
EXHIBIT 2: Private real estate returns have far outpaced inflation, providing an attractive
inflation hedge.
Annualized Returns by Inflationary Period (1978–2022)
9.5%
10.1%
16.0%
14.3%
14.5%
3.9%
17.4%
10.3%
2.6%
5.4%
8.0%
–0.9%
5.7%
10.4%
–5.3%
–10%
–5%
0%
5%
10%
15%
20%
Low Inflation (0%
–2.5%)
Moderate Inflation (2.5%
–5%)
High Inflation (>5%)
Private Core Real Estate
REITs
Equities
Fixed Income
U.S. 10-Year Treasury
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Q: Looking at past cycles, and given the number
of newer entrants into direct lending and the
substantial asset growth by existing participants,
how could direct lending perform in a recession?
David Gaito:
First of all, I believe the asset class
will perform well overall. The key tenets of this
business—spread premiums, better documentation
and covenants (loan terms) relative to the liquid loan
markets, and more investor access to borrowers—
have endured for decades. As a result, direct lending
has provided strong historical risk-adjusted returns,
including during times of market stress (Exhibit 3).
The direct lending market grew dramatically during
2021, and if you were investing during that time, you
were likely taking on more risk, however. Bull markets
tend to test an investor’s mettle. As it relates to direct
lending, I suspect that there were firms that lowered
their standards to become or remain relevant. More
pain for them may lie ahead as a result. The premier
Past performance is no guarantee of future results.
Not meant to represent the performance of any investment or products. Direct lending represented by the
Cliffwater Direct Lending Index; high yield represented by the ICE BofA U.S. High Yield Index, and leveraged loans represented by the S&P/LSTA Leveraged Loan
Index, investment-grade bonds represented by the Bloomberg U.S. Aggregate Bond Index, and emerging-market bonds represented by the JPMorgan Global
EMBI Index. Sources: Cliffwater, ICE BofA, S&P/LSTA, Bloomberg.
1.
Annualized Returns for Cliffwater, ICE BofA, and S&P/LSTA Indexes 10 years ended
12/31/22.
2.
Drawdown for COVID 19 was peak to trough for HY (2/20/20–3/23/20) and LL (1/26/20–3/23/20) while recovery was from 3/23/20–3/31/21. For
DL drawdown 12/31/19–3/31/20 while recovery was from 3/31/20–3/31/21 for both.
3.
Sharpe ratio for Cliffwater, ICE BofA, S&P/LSTA, Bloomberg U.S.
Aggregate, and JPMorgan Global EMBI Indexes 10 years ended 12/31/22. The Sharpe ratio compares portfolio returns above the risk-free rate relative to overall
portfolio volatility. See endnotes for index definitions.
EXHIBIT 3: Direct lending has delivered strong historical risk-adjusted returns, including during times of stress.
firms actually welcome this part of the cycle because
they know that the discipline they displayed over time
may ultimately be rewarded. This is a pretty simple
business if you have the right people with good
discipline. Success can be boiled down to: Can you
source credit? Can you underwrite credit? Can you
manage the credits after a closing?
The key to successful credit sourcing is being selective
and disciplined on the underwriting side and then
actively managing the credits post-close. The
middle market has rewarded thorough analysis of a
prospective borrower and the loan you are offering.
Yes, you need to underwrite a fundamentally good
business model and have a strong equity cushion, but
it is also important to know the counterparty (both
management team and owner); the soundness of the
document and covenants; and remaining an active
partner to set the right tone.
Stability in Time of Stress (February 2020–March 2021)
2
Higher Absolute Return than Liquid Counterparts
(10 Years Ended 12/31/22)
1
Greater Risk-Adjusted Returns (10 Years Ended 12/31/22)
3
8.89%
vs.
4.82%
&
4.01%
Direct
Lending
High Yield
Leveraged
Loans
–4.8%
–21.6%
–20.7%
14.4%
34.8%
31.3%
Direct Lending
High Yield
Leveraged Loans
 
Drawdown
 
Recovery
3.1
0.6
0.5
0.2
0.1
Direct Lending
Leveraged Loans
High Yield
Investment-Grade Bonds
Emerging-Market Bonds
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Lastly, scale has and will continue to change the game. The headlines are out
there, and there is a reason for bigger investment firms to be in the market: larger
counterparties, the “people” advantage, research, and distressed management.
What about technology? It’s not just your ability to spend more and have better
operating systems, but the ability to deploy technology that makes you a better
manager of credit. It’s analyzing your portfolio for trends that a human eye may not
be able to spot, and analyzing legal documents for key provisions. When you have a
sizable portfolio—300, 400, 500+ accounts—that could be an enormous advantage.
The biggest advantage of scale, however, may be the relevance to banks. Many
forget that banks provide approximately half of the capital in this asset class in
the form of leverage. This market tightened dramatically in 2022 and will likely
only tighten further in 2023 due to the current stress in the banking system. It will
be interesting to see who gets their dollars and more favorable treatment when
accommodations are necessary. I suspect it will be the larger institutions that have
broad and robust relationships with the particular bank(s).
Q: Over the past decade, investors have backed megafunds in private equity
(those with assets greater than $5 billion). What is the outlook for megafunds?
How does that relate to high-net-worth investors?
Michael Bailey:
Private funds raised trillions over the past five years ended 2022,
with one of the highest successes in the megafund category. I recall a time when
$1 billion was considered a large fund, but that is no longer the case with many
private equity funds in the $20 billion range. Megafunds tend to invest only in the
largest private equity transactions. In well-constructed private equity portfolios,
large and small private equity funds play different roles, like investing in a range
of market capitalization stocks benefits public equity portfolios. We believe in
a balance of large and small private equity funds, and that funds focused on
larger buyouts can still generate outperformance. We do see higher variation in
performance in smaller funds, though, and fewer macro factors driving smaller
funds’ performance. As one analogy, consider the challenges faced by a larger,
national distribution company compared with a regional player.
Another consequence of the explosion in megafunds is an opportunity in
secondary investing. Large institutional investors may need to trim back exposures
over time in this segment, and those portfolios are often highly exposed to
megafunds. This may create a particularly good buying opportunity for secondary
private equity investors. For high-net-worth investors in particular, the large funds
have been more accessible to them than smaller funds, due to innovation in that
space by intermediaries. High-net-worth investors have gained access to larger
funds that can allocate hundreds of millions to a single fundraising, and that tends
to lead wealthy investors to an overweight to megafunds compared to the overall
private equity market.
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Past performance is no guarantee of future results.
Not meant to imply the past or future performance of any investment. Source: Fidelity Investments, Societe
General (SG) Prime Services and Bloomberg Finance LP. The performance shown above is for illustrative purposes only. See endnotes for index definitions.
EXHIBIT 4: Uncorrelated liquid alternatives delivered strong returns amid challenging market backdrop in 2022.
Q: While liquid alternatives encompass many
different investment styles, the category has failed
to deliver against expectations over the last decade,
particularly relative to the performance of stocks and
bonds. However, this has changed more recently,
and particularly, in 2022, when we saw some very
strong uncorrelated returns from strategies such as
macro and CTAs that you mentioned earlier. What
has changed and how has market volatility impacted
the liquid alternatives landscape?
Mitch Livstone:
I believe the reasons for the historical
underperformance are twofold: Declining-to-zero
interest rates for a long time, and the unprecedented
performance of the stock market. Zero rates are
a critical point, as many of the liquid alternative
strategies are structurally designed to deliver 2%–4%
above cash. In an environment where cash is yielding
zero, the 2%–4% absolute return is terribly unexciting
compared to stocks delivering double-digit returns
year after year, and bond markets generally helping as
well. In a more normalized interest rate environment,
and especially in an inflationary environment, where
bonds are failing to provide diversification, liquid alt
returns of 6%–8% with low correlation to equities and
bonds seems much more interesting to investors. For
example, some trend-following strategies, which are
frequently used as diversifiers, had one of the highest
returns ever in 2022, with the SG CTA Index up 20.1%.
Uncorrelated liquid alternative strategies broadly
speaking delivered strong returns in 2022 (Exhibit 4).
With the more normalized rate environment, we
have also seen a pickup in volatility. Not surprisingly,
markets closer to the epicenter of the latest shocks
have had the most dramatic rise in volatility: Interest
rates have been extremely volatile with daily swings
not seen since the financial crisis, but currencies,
commodities, equities and credit markets have also
been experiencing heightened volatility. And higher
market volatility creates more opportunities for many
types of liquid alternative strategies. Systematic
liquid alts, such as CTAs and alternative risk premia,
may benefit from larger market swings and more
protracted trends, as well as the ability to harvest
more expensive risk premia. For discretionary
strategies, higher volatility may create more
idiosyncratic dislocations and more opportunity for
relative value trading. The one issue to be mindful of
is that liquidity may be more challenged, so having
skilled institutional quality trading may become very
important in this environment.
–18.1%
20.1%
9.5%
4.8%
–35%
–25%
–15%
–5%
5%
15%
25%
35%
Jan-22
Feb-22
Mar-22
Apr-22
May-22
Jun-22
Jul-22
Aug-22
Sep-22
Oct-22
Nov-22
Dec-22
S&P 500 Index
SG CTA Index
SG Macro Trading Index
SG Multi Alternative Risk Premia Index
Demystifying the Alternative Investing Landscape
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To learn more about alternative investing, please contact your Fidelity representative.
Endnote
1
Federal Deposit Insurance Corp., or www.fdic.gov.
S&P 500,
or Standard & Poor’s 500 index, is a market capitalization-weighted index of 500 leading publicly traded companies in the U.S.
NFI-ODCE Index (NCREIF),
short for NCREIF Fund Index Open End Diversified Core Equity, is the first of the NCREIF Fund Database products and is an index
of investment returns reporting on both a historical and current basis the results of 38 open end commingled funds pursuing a core investment strategy, some of
which have performance histories dating back to the 1970s. The NFI ODCE Index is capitalization weighted and is reported gross of fees. Measurement is time
weighted. NCREIF will calculate the overall aggregated Index return.
FTSE NAREIT All Equity REIT Index
is a market capitalization-weighted index that is designed to measure the performance of tax-qualified Real Estate
Investment Trusts (REITs) that are listed on the New York Stock Exchange, the NYSE MKT LLC, or the NASDAQ National Market List with more than fifty percent
of total assets in qualifying real estate assets secured by real property. Mortgage REITs are excluded.
Bloomberg U.S. Aggregate Bond Index
is a broad-based flagship benchmark that measures the investment grade, U.S. dollar-denominated, fixed-rate taxable
bond market. The index includes Treasuries, government-related and corporate securities, mortgage-back securities (agency fixed-rate pass-throughs), asset-
backed securities and collateralized mortgage-backed securities (agency and non-agency).
NYSE 10 Year Treasury Total Return Index
is a one contract futures index that aims to replicate the returns of maintaining a continuous rolling long position in
the Chicago Mercantile Exchange (CME) 10-Year U.S. Treasury Futures.
SG CTA Index
calculates the net daily rate of return for a pool of CTAs selected from the largest managers open to new investment. It is equal-weighted and
reconstituted annually.
SG Multi Alternative Risk Premia Index
represents risk premia managers who employ investment programs diversified across multiple asset classes while
utilizing multiple risk premia factors. These managers trade multiple asset classes such as equities, fixed income, currencies, and in many cases commodities,
and aim to capture a diversity of discrete risk premia, including most prevalently value, carry, and momentum. These multi-asset, multi-risk premia strategies are
typically systematic. Single asset class and risk premia programs are excluded. The SG Multi Alternative Risk Premia Index is an equally weighed, non-investable
index of funds.
SG Macro Trading Index
is a broad based performance measure for constituents that trade Global Macro strategies. These managers may typically employ
top-down fundamental research to forecast the effect of global macroeconomic and political events on the valuation of financial instruments and are frequently
focused on a diversified basket of instruments. In order to be eligible for inclusion as a constituent program, individual programs must predominately trade a
relevant Global Macro strategy, provide monthly performance data, and have AUM greater than USD 30 million.
Cliffwater Direct Lending Index
seeks to measure the unlevered, gross of fees performance of U.S. middle-market corporate loans, as represented by the
underlying assets of Business Development Companies (BDCs), including both exchange-traded and unlisted BDCs, subject to certain eligibility criteria. The CDLI
is an asset-weighted index that is calculated on a quarterly basis using financial statements and other information contained in the U.S. Securities and Exchange
Commission filings of all eligible BDCs. Returns shown are gross of fees because they capture the returns of the underlying loans in the index.
ICE BofA US High Yield Index
is market capitalization-weighted and is designed to measure the performance of U.S. dollar-denominated below-investment
grade (commonly referred to as “junk”) corporate debt publicly issued in the U.S. domestic market.
S&P/LSTA Leveraged Loan Index
is a market value-weighted index designed to measure the performance of the U.S. leveraged loan market based upon market
weightings, spreads, and interest payments.
J.P. Morgan EMBI Global/EMBI Global Diversified
series comprises USD-denominated Brady bonds, Eurobonds and Traded loans issued by sovereign and
quasi sovereign entities. The Diversified version limits the weights of the index countries by only including a specified portion of those countries’ eligible current
face amounts of debt outstanding. This provides a more even distribution of weights within the countries in the index. The EMBI+ series also tracks the universe
of emerging markets bonds but places a stricter liquidity requirement rule for inclusion. In addition quasi-sovereigns are not included in the EMBI+.
Information provided in, and presentation of, this document are for informational and educational purposes only and are not a recommendation to take any
particular action, or any action at all, nor an offer or solicitation to buy or sell any securities or services presented. It is not investment advice. Fidelity does
not provide legal or tax advice.
Before making any investment decisions, you should consult with your own professional advisers and take into account all of the particular facts and
circumstances of your individual situation. Fidelity and its representatives may have a conflict of interest in the products or services mentioned in these materials
because they have a financial interest in them, and receive compensation, directly or indirectly, in connection with the management, distribution, and/or servicing
of these products or services, including Fidelity funds, certain third-party funds and products, and certain investment services.
Authors
Michael Bailey
Head of Private Multi-Strategy Funds
Michael Bailey is Head of Private Multi-Strategy
Funds at Fidelity. In this role, Michael leads a team
responsible for managing investments in private
equity, including primary funds, secondary funds,
and co-investments.
Sladja Carton
Institutional Portfolio Manager
Sladja Carton is an Institutional Portfolio Manager
focused on alternatives investing. In this role,
Sladja works closely with the investment teams,
product teams and distribution channels to
support, enhance and expand Fidelity’s growing
suite of liquid alternatives products and solutions.
David Gaito
Head of Direct Lending
David Gaito is Head of Direct Lending at Fidelity.
In this role, David leads Fidelity’s direct lending
business, which is focused on making credit
investments in middle market companies
predominately owned by private equity firms.
Ellen Hall
Head of Direct Real Estate
Ellen Hall is Head of Direct Real Estate at Fidelity.
In this role, Ellen leads a team responsible for
bringing direct real estate investment products to
Fidelity’s institutional and retail clients.
Mitch Livstone
CIO of Arbitrage and Hedging Solutions
Mitch Livstone is the chief investment officer of
Arbitrage and Hedging Solutions. In this role, Mitch
is responsible for leading a team that develops
and runs alternative investments vehicles, focusing
primarily on relative value arbitrage strategies and
defensive hedging solutions.
Fidelity Thought Leadership Vice President
Martine Costello Duffy provided editorial
direction for this article.
Information presented herein is for discussion and illustrative purposes only and is not a
recommendation or an offer or solicitation to buy or sell any securities. Views expressed are as
of May 3, 2023, are based on the informa
tion available at that time, and may change based on
market and other conditions. Unless otherwise noted, the opinions provided are those of the
author and not necessarily those of Fidelity Investments or its affiliates. Fidelity does not assume
any duty to update any of the information.
Investment decisions should be based on an individual’s own goals, time horizon, and tolerance
for risk. Nothing in this content should be considered to be legal or tax advice, and you are
encouraged to consult your own lawyer, accountant, or other advisor before making any financial
decision.
Risks
Stock markets are volatile and can fluctuate significantly in response to company, industry,
political, regulatory, market, or economic developments. Foreign markets can be more volatile
than U.S. markets due to increased risks of adverse issuer, political, market, or economic
developments, all of which are magnified in emerging markets. These risks are particularly
significant for investments that focus on a single country or region.
The success of real estate assets will depend in part on many factors related to the real estate
market in general, and to the specific sub-markets in which the Fund’s real estate assets are
held. These factors include, without limitation, changes in general economic conditions; lease
defaults; decreases in property values; unanticipated property capital requirements; changes
in the financial resources of issuers/borrowers; natural disasters; changes in interest rates;
changes in the availability of debt financing and/or mortgage funds which may render the sale or
refinancing of properties difficult or impracticable; negative developments in the economy and/
or adverse changes in real estate values generally; and other factors that are beyond the control
of the Investment Manager. Use of leverage: Although intended to add to returns, the borrowing
of funds to purchase qualifying assets will expose the Fund to the risk that the returns achieved
on the qualifying assets will be lower than the cost of borrowing to purchase such assets and that
leveraging the Fund to buy such assets therefore diminishes the returns achieved by the Fund as a
whole. In addition, there is a risk that the availability of financing will be interrupted at some future
time, requiring asset sales to repay the outstanding borrowings or a portion thereof.
Liquid alternatives seek to accomplish their objectives through non-traditional investment
strategies that offer exposure beyond traditional stocks, bonds, and cash. Liquid alternatives
may not perform as intended in various market conditions or market scenarios. There can be no
assurance that a liquid alternative’s stated objectives will be met.
Commodity-linked securities may be more volatile and less liquid than the underlying commodities
themselves and the use of leverage may accelerate the velocity of potential losses.
Private equity assets are subject to those risks that are inherent in private equity investments.
These risks are generally related to: (i) the ability of each underlying fund to select and manage
successful investment opportunities; (ii) the quality of the management of each company in which
an Investment Fund invests; (iii) the ability of an underlying fund to liquidate its investments;
and (iv) general economic conditions. Securities of private equity funds, as well as the portfolio
companies these funds invest in, tend to be more illiquid, and highly speculative.
Investing involves risk, including risk of loss.
Alternative investment strategies may not be suitable for all investors and are not intended to
be a complete investment program. Alternatives may be relatively illiquid; it may be difficult to
determine the current market value of the asset; and there may be limited historical risk and return
data. Costs of purchase and sale may be relatively high. A high degree of investment analysis may
be required before investing.
Past performance and dividend rates are historical and do not guarantee future results.
Diversification and asset allocation do not ensure a profit or guarantee against loss.
All indices are unmanaged, and performance of the indexes includes reinvestment of dividends
and interest income, unless otherwise noted. Indexes are not illustrative of any particular
investment, and it is not possible to invest directly in an index.
Third-party marks are the property of their respective owners; all other marks are the property of
FMR LLC.
This material may be distributed through the following businesses: Fidelity Investments
®
provides
investment products through Fidelity Distributors Company LLC; clearing, custody, or other
brokerage services through National Financial Services LLC or Fidelity Brokerage Services LLC
(Members NYSE, SIPC); and institutional advisory services through Fidelity Institutional Wealth
Adviser LLC.
Personal and workplace investment products are provided by Fidelity Brokerage Services LLC,
Member NYSE, SIPC.
Institutional asset management is provided by FIAM LLC and Fidelity Institutional Asset
Management Trust Company.
© 2023 FMR LLC. All rights reserved.
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