Alternative Investment Opportunities Through a Slowing Economy

In the last ten years, the percentage of capital allocated to passively managed equityETFs and mutual fundshas gone from33% to 55%. 12 As these funds do not take active roles in their portfolio companies, despite being large shareholders, there has beena shift in company boards away from investors and toward independent boardmembers withoutmuch equityownership in the company. This less engaged shareholder and board dynamic potentiallycreates a situationwhere management teams are less alignedwith shareholders with fewchecks and balances at the board level. This is where activist hedge fund investors have looked to step into companiesand take a fully engaged, private equity-like approach to ownership. Activistmanagers evaluate a company’s business model, industry dynamic, and what is causing a perceived valuation gap and seek towork withmanagement and other shareholders to close that gap. This doesnot mean that activist investors target low-qualitycompanies. Rather, they focusonquality investments, as definedbelow, that are tradingat a significant gap to their intrinsic value for idiosyncratic reasons. Equityhedge fund strategies focusingon systematically investing in quality companiesalso have the potential to generate alpha in a passive world.While the definitionof a “quality” investment may differ substantially from investor to investor, in general, high-quality companies tend to have a combinationof: • highprofit margins • healthy balance sheets • growingprofits and/or dividends • stable future cash flows • strong management • sustainable competitive advantage A stock portfoliowithaquality bias has historicallydemonstrated stronger comparative returns than a more diversified broad-based portfolio. 12 Bloomberg, as of May 31, 2023 OPPORTUNITIES | WEALTH OUTLOOK 2023 | MID-YEAR EDITION │ ALTERNATIVE INVESTMENTS | 18