Alternative Investing Strategies After Evergrande and Tapering

• Chinese property credit risk and Fed tapering both hit equity markets last week.
• UBS said investors should consider diversifying into alternative assets ahead of Q4.
• Insider breaks down the bank’s top three alternative sources of return.

Stock markets were roiled last week when China’s second-largest property developer Evergrande struggled to cover liabilities of $300 billion and the

Federal Reserve
announced it will begin scaling back asset purchases “soon”.

Both events point to looming stock market risks, according to Mark Haefele, the chief investment officer at the Swiss investment bank UBS – the world’s biggest asset manager.

“Markets were volatile last week, as investors wrestled with worries over credit risk in China’s property market and Fed tapering,” Haefele said in a recent research note. “With various risks on the horizon, investors can consider diversifying their sources of risk and return in the final quarter of the year.”

UBS said although both events had injected some volatility into global markets, there remained potential upside for equities.

“While evolving events could prompt further bouts of volatility, we don’t see a broad systemic risk that would cause investors to underweight China, or equities more widely,” Haefele said. “We advise caution only in affected sectors like Chinese property and financials.”

However, with equity markets still close to record highs, the bank said now is the perfect time for investors to diversify their portfolios.

“Alternatives can offer a way to potentially enhance portfolio returns and increase diversification,” Haefele said. “We believe investors should consider a range of alternative sources of return as we approach the fourth quarter.”

Insider breaks down UBS’s three preferred alternative investment strategies.

Put options and structured products

A put option gives its owner the right to sell a specified amount of a stock when it reaches a certain price. These tend to increase in value as an asset’s volatility rises.

UBS said options strategies currently represent an attractive alternative to bonds as a hedge against stock market declines.

“The demand for put options, which help protect against equity market declines, has increased,” analysts said. “Investors looking to hedge equity exposure should consider put spreads, or similar structures, that combine both long and short positions to cheapen protection.”

The bank also recommended retail investors look into structured products. These offer access to derivatives, which are financial contracts between multiple parties.

“Investors who would like to participate in further upside, but fear short-term pullbacks could consider using structured investments with levered upside and downside protection characteristics,”…