Syz outlines alternative assets revolution

Cryptocurrencies and litigation finance are increasingly being included in alternative portfolios, yet there are significant challenges to trading non-traditional investments.

Alternative investments have long been viewed as a crucial component of any diversified portfolio, offering returns that not directly correlated with traditional equities and bonds.

But while alternatives have been historically attractive, they are now undergoing a major transformation, believes Marc Syz, chief executive officer of boutique Swiss investment firm Syz Capital, part of the eponymous Geneva bank co-founded by his father Eric in 1996.

“Over the past two decades, we have seen a massive shift in the alternative investment space,” explains Mr Syz. “The performance we saw in alternatives was largely driven by very low interest rates. The environment was relatively uncompetitive, with fewer players in the space, meaning that opportunities were available with a smaller pool of capital.”

However, the dynamics of the market have since changed. With interest rates rising and more capital flowing into alternatives, returns have moderated. This shift has led investment managers, including Syz Capital, to hunt for more specific, uncorrelated opportunities aligning with a longer-term investment horizon.

“In the private equity space, we are focusing on small and medium-sized enterprises, particularly in the B2B sector in Europe,” he says. “These businesses are often overlooked, and valuations are far more attractive than their US counterparts.”

Syz Capital is particularly optimistic about the European market, which it believes has been undervalued in recent years.

Attractive valuations

“Europe is home to some of the world’s most innovative companies, many of which have been family-owned for generations. These businesses are often undervalued, especially compared to their US peers,” Mr Syz explains. “We see a huge opportunity, particularly in small and mid-cap businesses, where valuations are more attractive.”

He adds that Europe’s focus on family-owned businesses in the B2B space presents significant growth potential, “especially given that Europe is home to a much larger number of small and medium-sized enterprises compared to the US, but with fewer players in the market chasing those opportunities”.

While traditional asset classes, including private equity and venture capital, have become increasingly correlated with the broader market, Mr Syz sees alternative asset classes such as litigation finance or legal assets as promising areas for diversification.

“Litigation finance has been one of the most uncorrelated asset classes we have seen year after year,” he says, describing increasing investor appetite for assets linked to environmental, social and governance (ESG) goals. “We’re backing claims that are often ESG-driven. These types of investments are insulated from market movements and have the potential to provide stable, uncorrelated returns.”

Digital dividend

The Swiss firm has also made strides in the digital asset space, with particular confidence in the resilience of bitcoin, which Mr Syz rates well above other crypto assets.

“Bitcoin is the only true store of value out there,” he asserts. “It’s not just a utility; it has actual value and utility as a store of wealth.” This belief is central to Syz Capital’s strategy, which focuses on bitcoin as a core asset within the broader digital asset space.

While acknowledging the transformative potential of blockchain technology, he remains cautious, however, about the long-term viability of most cryptocurrencies.

“Crypto is a very mixed bag,” he says. “There’s the technology behind it, which we absolutely believe in — it’s the blockchain, and that technology will definitely survive. It has a lot of applications.”

But he doesn’t foresee most cryptocurrencies enduring, likening the current crypto market to a venture capital investment with immense uncertainty. “Think of it like venture capital,” he explains. “Most cryptocurrencies out there may not survive. You wouldn’t have known 15 years ago whether Facebook would be a $10bn or a $1tn company. That’s the same with crypto.”

Private hype cycle

Candid about his views on the current state of private markets, Mr Syz describes the space as being in the midst of a hype cycle.

“We’re in a hype moment,” he asserts, drawing parallels to past market trends. He recalls how, decades ago, hedge funds were viewed as a magic solution for investors, largely due to inefficient markets and the absence of electronic trading.

“Thirty years ago, when my father brought hedge funds back from the US to Switzerland, everybody thought anyone with a hedge fund was making money,” he says. “The markets were a lot less efficient, and there were huge opportunities to generate returns.”

However, he highlights how that landscape has changed, noting that today’s hedge fund environment is far more competitive and efficient, with thousands of funds vying for returns. Even the top players in the space, such as Point72 and Citadel, are no longer producing the same returns they once did.

He draws a parallel with private equity, noting that the same dynamics are now playing out in the private markets. When KKR, Carlyle, and Blackstone were much smaller, they were making large returns. “Now they’re making a third of that.” The influx of capital and the rise of thousands of private equity funds competing for deals has inflated valuations and reduced returns. “Before, maybe one or two parties would be competing for a deal; now you have ten, and what happens? The price goes up, and returns come down.”

Despite these changes, Mr Syz believes private markets are here to stay, just like the hedge fund industry. “The problem is the returns are going to come down,” he explains. “You’re going to see certain players moving out of the market because they can’t raise money anymore.” He anticipates that new, emerging asset classes will rise to fill the gap. “We’re looking for new niches in this alternative space, where the risk-reward balance is much better,” he says, signalling Syz Capital’s focus on finding innovative opportunities with stronger risk-adjusted returns.