Morgan Stanley chief investment officer david darst advises on alternative investments
Investors should consider allocating up to 20% of their portfolios to alternative investments, including hedge funds, according to David Darst, chief investment officer at Morgan Stanley Private Wealth Management.
Speaking at the recent Banque PrivÃ©e Edmond de Rothschild Europe's conference in Italy, Darst said the full 20% could be considered in a scenario of moderate growth and inflation with the oil price at about $26.23 per barrel.
If oil falls to about $21.22, and there is some inflation and healthy growth, the allocation to alternatives could be reduced to 15%, with equities increased from 45% to 50% of the portfolio, and bonds reduced by five percentage points to 25%.
Darst said the allocation could prove useful if markets fall further. 'The Nasdaq has fallen from 5,048 in March 2000 to about 1,500 in May,' he said. 'But I am surprised it has not fallen more.'
He said profit margins from many big US firms in the first quarter came from cost cutting and appeared healthy when measured against year-earlier figures. 'But they are saying, 'we still cannot give you any good news about the third and fourth quarters this year',' Darst added. However, Ernest Boles, managing director of Morgan Stanley's Private Wealth Management division, said the remaining regulatory, tax and market issues around the delivery of hedge funds in Europe have a 'chilling effect on the actual use of hedge funds'.
Boles said one way of delivering hedged products into France is via life insurance capitalisation contracts, but he did not recommend investing more than 30% of the life insurance contract in alternative products. Those products used should also be listed in OECD jurisdictions and offering monthly or better liquidity.
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