In the latest episode of the Alternative Allocations podcast series, I had the opportunity to interview Matt Brown, Founder and CEO of CAIS, at the inaugural CAIS Live educational event. Matt and I discussed the democratization of alternative investments, the limitations of the traditional 60/40 portfolio and the lessons learned from institutions that have historically used alternatives in a very meaningful fashion. Institutions have historically used alternative investments based on their strong risk-adjusted returns, as an alternative source of income, as a tool for dampening portfolio volatility and a way of hedging the impact of inflation. Not surprisingly, they have represented significant allocations across the various types of institutions.
While hedge funds have been available longer to the wealth management channel, private markets (private equity, private credit, real estate and infrastructure) are relatively new to this group of investors. The introduction of registered funds has made these elusive investments available to a broader group of investors, at lower minimums, and offer greater flexibility. There is still a bit of a learning curve regarding the merits of the strategies and the various product structures available to access them.
I asked Matt about the key findings in the 2023 CAIS/Mercer Advisor Survey1, and he noted that “. . . the question that we got most encouraged about was the fact that almost 90% of advisors plan to increase their allocation to alts in the coming years. So, I think the message is getting through that if you want to improve client portfolio performance, if you want to attract more sophisticated clients, if you want to merge with firms who have alts practices, alts are becoming, well, let’s just say more traditional.”
Although advisors are reportedly looking to increase their allocations to alternatives, overall industry allocations to alts have remained at about the same level for the last decade. I asked Matt how we can help advisors gain knowledge and proficiency with alts. He said, “I think that first big challenge to change the alts allocation is really leaning on the front foot, and looking at education as a primary driver for adoption. If we can get financial advisors up to speed on understanding the strategies of alternative investments, how to implement those in a broader client portfolio, and speaking fluently with their clients about alts, you’re going to start to see those numbers change a lot more like the institutional investors that you just referenced.”
WHAT ARE THE RISKS?
All investments involve risks, including possible loss of principal.
Investments in many alternative investment strategies are complex and speculative, entail significant risk and should not be considered a complete investment program. Depending on the product invested in, an investment in alternative strategies may provide for only limited liquidity and is suitable only for persons who can afford to lose the entire amount of their investment. An investment strategy focused primarily on privately held companies presents certain challenges and involves incremental risks as opposed to investments in public companies, such as dealing with the lack of available information about these companies as well as their general lack of liquidity. Diversification does not guarantee a profit or protect against a loss.
An investment in private securities (such as private equity or private credit) or vehicles which invest in them, should be viewed as illiquid and may require a long-term commitment with no certainty of return. The value of and return on such investments will vary due to, among other things, changes in market rates of interest, general economic conditions, economic conditions in particular industries, the condition of financial markets and the financial condition of the issuers of the investments. There also can be no assurance that companies will list their securities on a securities exchange, as such, the lack of an established, liquid secondary market for some investments may have an adverse effect on the market value of those investments and on an investor’s ability to dispose of them at a favorable time or price. Past performance does not guarantee future results.
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1. Source: CAIS, Mercer “The State of Alternative Investments in Wealth Management.” 2023
The findings in this report are based on survey responses from a total of 260 financial advisors, and the number of respondents for each question varied. The survey was conducted over a seven-week period, between Sept. 12, 2023, and Oct. 30, 2023. Responses were collected from attendees during the second annual CAIS Alternative Investment Summit, and via email outreach and platform promotion to professionals who are part of the CAIS network.
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