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Asset allocation in investment
Asset allocation in investment

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4.1 Trends in asset classes

Since the 1980s, a number of new asset classes have been added to the three basic types of asset: equities (UK and non-UK), bonds, and cash.

The figure below shows how, in the last few decades, more and more asset classes have been added to the opportunity set to aid portfolio diversification.

Figure 1: Trends in asset classes

For example, since the early 2000s, new types of asset, sometimes called alternative assets, have been developed. These include private equity, hedge funds, commodities, infrastructure funds, structured products, and many more. Private equity is equity investment in companies not listed on a stock exchange, often with substantial leverage to raise expected equity returns. Hedge funds are funds with specialised investment strategies, often using leverage and derivatives, aiming to offer a good return per unit of risk and low correlation with conventional bond and equity markets. An example of a hedge fund strategy is so-called long/short (buying shares expected to rise in value, selling short those shares expected to fall in value, with zero net exposure to the stock market).

Credit ratings allowed the development of complex bonds which could be structured to provide particular levels of credit rating, such as high yield, to meet particular investor needs. High yield debt is debt issued by companies which have a below investment grade rating (or which has become high risk through poor performance). Commodities include gold, energy, minerals, etc., and infrastructure includes housing, railways, windfarms and motorways.