By Lisa A. Ditkowsky, CFP®
Financial Advisor and Private Wealth magazines are currently bringing the nation's most sophisticated financial advisors up to speed on alternative investment strategies in Chicago. Charter Financial Publishing Network Inc. is hosting its 2nd annual Innovative Alternative Strategies Conference at the Palmer House Hilton through today. The historic grandeur-filled landmark-with it's awe-inspiring mix of old meets new-could not be a more fitting setting for sponsors and exhibitors showcasing their investment makeovers on yesterday's trends.
The need to bring investment strategies once just available to the wealthy to the mass affluent is a surfacing theme. For any advisor who has managed portfolios in a complacent bubble, it is now impossible not to take note of the mainstreaming of non-correlated asset classes and strategies into Modern Portfolio Theory. Assets and strategies once thought risky are now presumed to reduce risk. Traditionally non-correlated asset classes, added to offset beta in a large portfolio are now thought necessary for income and return. Just five years ago, commodities, REITS, emerging markets equities and debt, private equity and similarly situated "high risk" investments were occasionally added to portfolios of the mass affluent and high net worth for diversification. Now, these categories are often seen as essential to building income portfolios and enhancing return.
Most investment companies seem to be launching similar messages in a bottle proclaiming that they have the best exit strategies, access to liquidity and barriers to entry. "We built a strategy where you can now access alternative investments in mutual fund form," said Allen Webb of Alpha Capital Management. Hedge funds used to be elite and information access difficult, but now more open-ended mutual funds promise transparency, low account minimums and daily liquidity (with hedge fund-like returns, of course). Regulation does not appear to deter former hedge fund shops from re-opening as friends of the mom-and-pop investor. After all, no one wants to be thought of as the next potential Madoff. Compliance and the regulatory environment, formerly the bane of an entrepreneurial strategist's business, are now quasi-marketing friends.
Some conference presenters noted that the investor must seek diversification and specific niches in non-traditional asset classes just as with stocks and bonds. The logical conclusion that they want us to draw is that simple asset allocation can be applied to hedge funds, private equity, oil and gas, and other alternative investments.
Anyone about to retire knows that to depend on the government to build a retirement income would be to own five-year CDs at roughly 1.5 percent. This equates to a $15,000 a year salary for a couple with a million dollars. Most of us would need a 6- to 7-percent interest rate just to survive, and this assumes a small Social Security income or pension source. Investors must turn somewhere for yield if they are to maintain principal, and hence the need for this mainstreaming of alternatives. Conference exhibitors mentioned the importance of asking wholesalers what yields are net of operating costs and fees. Likewise, investors need to be given the real return of the alternatives they are investing in, or that yield is meaningless.
Robert P. Morgan, director of private equity at Northern Trust Global Advisors Inc., said that clients do not just want access to funds, "everyone wants a deal." He told a conference audience that his firm offers a broad array of investors access to private equity in through fund-of-funds and customized separate account programs. "I think clients are getting much more mature about private equity and venture capital," he noted. It seems more the case that firms like his are getting increasingly savvy at reaching more clients.
Adam Claypool, managing director of DeWaay Investment Banking, looks to select secondary exchanges for private equity in the market to
facilitate some of his firm's more cutting-edge transactions.
Another conference participant, Jeffrey Gundlach, CEO of DoubleLine Capital and billionaire bond investor, gave this advice to a packed ballroom over lunch: "The problem with long munis (ten years and longer) is that there is really no way to win."