In our inaugural episode of the Alternative Allocations podcast series, I was joined by my friend John Bowman, Executive Vice President at the Chartered Alternative Investment Analyst (CAIA) Association, and we discussed the state of the alternative investments landscape. John reviewed the growth and diversity of the alternative investments marketplace, with roughly US$22 trillion in assets under management, which has been largely from institutions and family offices.1
We also reviewed the growing interest from the wealth management channel, which we refer to as the democratization of alternative investments. We discussed the key factors fueling the democratization of alternatives, including:
- The current market environment is demanding an expanded toolbox to meet investor needs.
- Product innovation has made access to alternatives more achievable.
- Access to institutional-quality managers is required in these specialized markets.
As the wealth management community gains increased access to private markets, we discussed the benefits of an alternative investments education, and how important it is that wealth advisors take the lead in educating investors about the merits of each strategy, their risk and return characteristics, and the structural tradeoffs.
John focused on one the biggest challenges and misconceptions for advisors and investors—liquidity. He stated, “. . . liquidity, unfortunately, is one of the most misunderstood elements of investing. This is not inherently good or inherently bad. It’s a feature that you need to understand alongside of every other feature.” For investors to capture the illiquidity premium often associated with private markets, they must commit capital for an extended period of time (7-10 years), to allow the managers to unlock the value of these private companies.
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WHAT ARE THE RISKS?
All investments involve risks, including possible loss of principal. Equity securities are subject to price fluctuation and possible loss of principal. Fixed income securities involve interest rate, credit, inflation and reinvestment risks, and possible loss of principal. As interest rates rise, the value of fixed income securities falls.
Alternative strategies may be exposed to potentially significant fluctuations in value.
Real estate investment trusts (REITs) are closely linked to the performance of the real estate markets. REITs are subject to illiquidity, credit and interest-rate risks, and risks associated with small- and mid-cap investments.
Privately held companies present certain challenges and involve 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.
Active management does not ensure gains or protect against market declines.
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1. Source: CAIA, as of December 31, 2022.