Liquid alternative assets can help UK pension schemes position their portfolios for greater resilience, while still meeting their return objectives, Aon has said.

The firm claimed that heightened market volatility and expensive equity and credit valuations have caused financial turbulence for institutional investors.

As a result, many defined benefit (DB) schemes have found themselves overweight in allocations to illiquid assets, particularly since the 2022 gilts crisis, according to Aon.

Aon investment partner, Guy Saintfiet, said this is especially problematic for schemes that want to move to an insurance-based solution.

He stated: “Liquid diversifiers—alternative strategies that invest in a range of asset classes and investment styles in accessible and liquid ways—offer a path to portfolio resilience with genuine diversification. These strategies can help mitigate equity and credit market risks while contributing to consistent and uncorrelated absolute returns.

“However, investors must be clear on their objectives when deciding whether to allocate capital to liquid alternatives.

"For example, investors with a more short-term investment horizon, such as schemes looking to buyout in the near future, will value a steady return profile. For them, investing in liquid alternatives can play a vital part in maintaining a diversified and more resilient portfolio.”

The firm said allocating liquid alternatives can be a challenge for all but the largest institutional investors, as it requires significant expertise and resources.

According to Saintfiet, this is why the best approach is often to outsource the implementation.

Aon investment partner, Tim Banks, added: “When implemented correctly, our experience is that a liquid alternatives allocation can be a vital portfolio component for institutional investors looking to target steady absolute returns or when they want to improve the resilience of their portfolios.

"We’ve seen growing demand from clients for diversification and growth assets that provide downside protection - this solution perfectly aligns with these requirements.”

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