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Alternatives Need to Become Part of Core Portfolio Strategy, CAIA Event Stressed

A redesigned CAIA certification program for alternative investments highlights the need for advisors to approach the sector as a long-term, strategic play.

To reflect the growing array of alternative investment options and the fact that these products are gradually becoming part of some retail investors’ portfolios, the Chartered Alternative Investment Analyst Association has redesigned its Fundamentals of Alternatives program offered through its UniFi by CAIA platform.

The upgraded certification program focuses not only on the alternative products available, but on the role each of these products can play in a client’s overall portfolio. The redesign was helped by UniFi’s by CAIA’s advisory council, whose members spoke at the program’s launch event in New York City this week.

Members of the council, including investment managers from Blackstone, Morgan Stanley and Bank of America, stressed that wealth advisors today need to think of alternatives as a long-term investment strategy for their clients rather than as add-ons and stand-alone deals.

Over the past 20 years, the alternatives market has gone from one heavily dominated by hedge funds and largely closed off to retail investors to one with opportunities in private equity, private credit, real estate, secondaries and an array of other options to the wealth channel that are comparable to what has been historically available to institutions, speakers at the launch said.

In addition, the growth in privately-held companies over that time period has made it imperative for high-net-worth individuals to put some of their money in the space in order to reap the benefits of investing in innovation, noted Joan Solotar, managing director and global head of private wealth solutions with Blackstone.

“What you see as the pie chart of what’s considered alternative investments today 100% inverted” from 20 years ago, said Anna Snider, head of investment selection and chief investment officer at Bank of America and Merrill, who also serves as chair of the UniFi by CAIA board.

However, many advisors continue to approach alternatives opportunities piecemeal, essentially trying to sell their clients specific products rather than developing long-term investment strategies. What they should be doing instead is taking a big picture approach and having conversations about how various alternatives can fit into their clients’ overall portfolio, according to speakers at the event.

“The reality is that wealthy individuals aren’t choosing an advisor because she or he has come up with the coolest little niche fund that no one else has,” said Solotar. “It’s just not how wealthy people are choosing their long-term advisor. They want tried-and-true institutional-quality product. They want someone who really understands what their needs are for return, for risk tolerance, for liquidity and to manage that portfolio.”

While more education and new technology platforms have made it easier for advisors to understand alternative investment options, when someone opens a new advisory account, allocations to alternatives are still not a core part of the initial conversation about long-term goals, noted Jeremy Beal, managing director, head of asset management and insured solutions, wealth management at Morgan Stanley. The wealth management industry needs to develop a framework to discuss how various alternatives fit inside a portfolio, he noted.

“It makes much more sense sitting down with clients and helping them understand why they are moving parts of that 60/40 portfolio into alternatives. It’s a much more logical conversation than trying to sell alternatives as a separate asset class,” Beal said.

Part of that conversation would need to focus on the fact that there might be trade-offs in liquidity with some alternatives options, but that they can still deliver on other portfolio goals clients might have—for instance, diversification and being able to invest in high-growth sectors of the economy, according to Beal. At the moment, for instance, that would involve new developments in AI, bioscience, energy infrastructure and digitization—fast-growing industries where a lot of alternative asset managers are investing.

Advisors also need to set realistic expectations around what various alternative products can deliver. But liquidity should not be the primary consideration when investing in alternatives, according to Solotar. Advisors should focus on long-term returns and picking good companies and experienced asset managers.

She brought up the example of Blackstone’s acquisition of Hilton Hotels for $26 billion right before the Great Financial Crisis. Blackstone sold the company at a $14 billion profit 11 years later. If liquidity was a priority, the firm would likely have ended up selling Hilton at exactly the wrong time, Solotar noted. Instead, since Blackstone felt confident that Hilton was a great company and that it had the management skills to help turn it around, investors in the real estate fund that purchased Hilton ended up making three times their invested capital.

“Even though there are liquidity mechanisms, you should not be investing in any of these funds as a trade,” Solotar said. “That’s not what they are intended to do.”

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