Demand for alternative investments is expected to stir “substantial growth over the next five years,” Andrew Dreaneen, head of Schroders' GAIA (Global Alternative Investor Access) Product & Business Development, told reporters attending the asset manager's annual London press conference earlier this month.

Alt dollars invested in commodities, liquid alternatives, institutional loans, real estate, hedge funds and private equity amounting to $8.1 trillion in 2012 grew to $10.8 trillion by 2015. But Dreaneen projects a high of $14.6 trillion by 2018 and $18.1 trillion by 2020, with pension funds holding the largest proportion by then, followed by the mass affluent, high-net-worth individuals, insurers and sovereign wealth funds.

Investors are largely based in North America, which has had a slightly larger proportion since 2012, and North American investment is expected to grow to more than $6 trillion of the $18.1 trillion by 2020, according to Strategy&, PwC's strategy consulting team.

One of the alt investments discussed at the Schroders' event was insurance-linked securities (ILS), which essentially are instruments that transfer insurance risks to investors. But ILS pay investors a premium for assuming this type of risk, says Daniel Ineichen, Schroders' fund manager for insurance-linked securities, one of the firm's 22 full-time ILS professionals.

The most standardized of ILS instruments are catastrophe bonds, which are seen as long-term, lower-risk investments because their drawdowns are less frequent compared with those of the broader financial markets. The MSCI World Index of global equities shows incidents of one 10 percent drawdown in 1.5 years and one 15 percent drawdown in five years. Catastrophe bonds had one 10 percent drawdown in 25 years and one 15 percent drawdown in 30 years, according to research by Schroders, Secquaero, Bloomberg, and BofA Merrill Lynch.

Another bond favored by Schroders' analysts, and for which the manager has a fund -- Schroder ISF Global Convertible Bond Fund -- is the packaged global convertible bond. The fund has closely tracked the MSCI ACWI, with the exception of the period from the Brexit vote on June 23 through Sept. 2 when the index recovered faster than the fund.

Convertible bond issuance reached nearly $10 billion in August and September 2016. And, says Martin Kuehle, Schroders' convertible bond investment director, “they're relatively cheap.”

Among the things Schroders' active managers look for in selecting the bonds is strong equity momentum in the underlying stock, says Kuehle.   
 
But there are mixed indications for the months ahead. “As always, this advice is much easier to give to investors in convertible bonds, with the in-built safety net of a bond floor," says Kuehle. "Convertible participation in the equity market via a long-term option, paired with strong credit selection, continues to provide investors in convertible bonds a good mix of equity exposure and safety.”