The role of alternative investments in modern portfolios raises questions about risk management and opportunity assessment, areas where Toby Watson’s experience proves particularly relevant.
Alternative investments have become increasingly important components of sophisticated portfolios, yet they present distinct challenges in evaluation and risk management that differ considerably from traditional assets. Toby Watson brings extensive experience from structured finance to assessing complex investment opportunities, having spent years analysing intricate financial instruments and their risk characteristics. His current role as Partner at Rampart Capital involves evaluating alternative strategies alongside conventional investments, seeking opportunities that offer genuine diversification benefits whilst managing associated risks.
As Partner at Rampart Capital LLP since February 2020, Toby Watson contributes to the firm’s approach of integrating alternative investments within diversified portfolios for wealthy families. The London-based independent office specialises in absolute return strategies that combine conventional and alternative approaches, seeking uncorrelated return sources across diverse markets. Rampart’s investment philosophy emphasises factor analysis and risk-adjusted returns, with alternative strategies forming part of a broader toolkit for portfolio construction. The firm’s independence allows flexibility in accessing alternative investments based purely on client suitability rather than institutional product requirements.
Understanding Alternative Investments
The term „alternative investments” encompasses diverse strategies outside traditional stocks and bonds, including private equity, hedge funds, real assets, structured products, and direct investments. What unites these disparate categories is typically some combination of illiquidity, complexity, or non-standard return patterns. The category has expanded considerably as investors seek diversification beyond public markets.
Several factors explain increasing allocation to alternative strategies:
- Traditional asset correlations have shifted, with stocks and bonds sometimes moving together
- Low-interest rates compressed expected returns from conventional portfolios
- Alternatives matured as an industry, with improved transparency and broader accessibility
Toby Watson observes that alternatives now represent standard portfolio components for sophisticated investors rather than exotic additions.
Risk Considerations in Alternative Investments
Many alternatives involve locking capital for extended periods—private equity funds typically commit capital for 10+ years, whilst real estate investments may require multi-year holding periods. This illiquidity demands careful consideration of overall portfolio liquidity needs. Toby Watson emphasises that illiquidity premiums can enhance returns, but insufficient liquid reserves creates risk of forced sales during market stress. The key involves matching illiquid commitments with client time horizons.
Unlike public securities with daily pricing and regulatory disclosure, many alternatives provide limited transparency about underlying holdings and valuation methodologies. Private equity funds may report quarterly with significant lag, whilst hedge funds vary enormously in disclosure practices. Experience from Toby Watson’s Goldman Sachs career in structured products proves valuable when evaluating complex alternative structures and assessing whether limited transparency reflects genuine strategy protection or concerning opacity.
Alternative investments typically depend heavily on specific manager skill. Thorough due diligence becomes essential, examining track records, investment processes, and alignment of interests. Key considerations include:
- Manager tenure and team stability
- Consistency of strategy implementation over time
- Fee structures and their impact on net returns
The concentration of returns among top-performing managers makes selection particularly crucial in alternatives.
Toby Watson’s Approach to Evaluating Alternatives
Rather than viewing alternatives as separate asset class, factor analysis examines underlying risk exposures and return drivers. Understanding these underlying factors enables better portfolio construction and more accurate risk assessment. Toby Watson applies analytical approaches developed in structured finance to decompose complex alternative strategies into comprehensible risk components.
Beyond investment merit, operational capabilities determine whether attractive strategies translate into actual returns. Operational due diligence examines fund administration, custody arrangements, and controls. The rigorous analytical approach from Toby Watson’s Goldman Sachs background extends to operational assessment, recognising that operational risk can overwhelm investment returns.
Individual alternative investments should be evaluated based on portfolio contribution rather than in isolation. An investment with attractive standalone characteristics may not suit a particular portfolio if it increases concentration in existing exposures. Toby Watson emphasises this portfolio-level thinking, considering how alternatives interact with other holdings.
Opportunities in Alternative Investments
Several areas present opportunities difficult to access through public markets. Private equity provides access to companies before or after public listing, potentially capturing value during transition periods. Real assets offer inflation protection and income streams with different characteristics than financial assets. Certain hedge fund strategies exploit market inefficiencies or provide portfolio insurance.
The alternative’s industry has matured considerably, with improved infrastructure, greater transparency, and fee compression in some segments. New structures have emerged, offering greater liquidity than traditional formats. Technology has enabled new alternative strategies whilst making some traditional approaches more competitive. Toby Watson notes that this evolution has made alternatives more accessible whilst requiring updated evaluation frameworks.
Infrastructure investments offer inflation-linked income streams whilst addressing societal needs. Private credit has expanded as banks retreated from certain lending activities. Niche strategies in real assets or specialised lending may offer uncorrelated returns. However, emerging opportunities require particularly thorough assessment, as track records remain limited.
Implementation Considerations
Appropriate allocation depends on individual circumstances, including liquidity needs, time horizon, and capacity to conduct due diligence. Some investors commit 20-30% to alternatives, whilst others maintain minimal exposure. Toby Watson works with clients to determine suitable levels based on their specific situations rather than applying standard formulas.
Traditional „2 and 20″ structures—2% management fee plus 20% performance fee—remain common, though fee compression has occurred. Understanding fee impact on net returns proves essential, as high fees can eliminate advantages from gross performance. Experience from Toby Watson’s Goldman Sachs career helps in evaluating complex fee arrangements and their implications for actual investor returns.
Despite less frequent reporting than public securities, alternatives require ongoing attention. Monitoring involves tracking capital calls and distributions, reviewing periodic reports for strategy drift, and maintaining awareness of broader market conditions. Portfolio-level monitoring examines whether alternatives deliver expected diversification benefits. Toby Watson emphasises that successful alternative investing requires commitment to ongoing oversight.
