Alternative credit should play a pivotal role in client portfolios, but instead tends to be underexploited, both in terms of asset allocation and the implementation options selected. Notably, alternative credit can play a role in helping to reduce the reliance on the equity risk premium to drive investment returns and as such help to improve investment efficiency and portfolio robustness.

Investors have historically accessed alternative credit through hedge funds or small off-benchmark allocations within existing traditional fixed income mandates. In recent years, dedicated alternative credit specialists and strategies have emerged, making it more accessible. However, there is still a long way to go as the asset class remains underinvested and misunderstood by many institutional investors. Towers Watson views alternative credit as a key part of a portfolio’s strategic asset mix and a space where utilising active managers can be well rewarded.

This paper seeks to explore the asset class, defining the key characteristics, the different component pieces, the strategic role in portfolios and some of the challenges of effective implementation.