An option in the search for yield is to look at alternative investments with a comparable risk profile but with a higher expected return.
Many institutional investors are struggling to maintain funding and solvency ratios in the current market environment, with record-low interest rates and risky assets still recovering from the coronavirus crisis.
The traditional road to recovery is to enhance the expected return by increasing the risk budget, for instance by shifting from fixed income to equity investments. However, this road is nowadays often blocked by restricted risk budgets, for instance due to regulatory constraints imposed in case of underfunding. Another option in the search for yield is to look at alternative investments with a comparable risk profile but with a higher expected return.
Two examples of alternative strategies
In this article we provide two examples of alternative strategies. Both strategies offer a significant yield pickup over liquid investments with the same credit risk profile, and hence help institutional investors to increase their funding and solvency ratios. Moreover, these alternative fixed income strategies also allow investors to have a positive impact with their investments and some risk diversification on the balance sheet. We therefore expect the alternative fixed income market to grow further, especially for institutional clients who have room to add illiquid assets to their balance sheet.
