In the lead-up to the most recent Fed policy meeting, some investors were optimistic that policymakers would become less hawkish in the coming months. The price of oil had declined dramatically from highs set earlier in the year, while July’s CPI print indicated that inflation, though still high, was showing signs of abating.
Those hopes, of course, were off base. Spurred by more recent data showing that inflation in August was higher than many expected, the Fed raised rates by 75 basis points last month. Moreover, Chairman Jerome Powell has continued to underscore that the Fed will do whatever is necessary to snuff out inflation in the form of further rate hikes. Since then, stocks have plummeted, further souring an already poor market environment.
Not surprisingly, the mounting economic and market challenges in 2022 have sparked a renewed interest in alternative investments, including private credit, private equity, and hedge funds.
In the past, most individuals had few, if any, opportunities to deploy capital in this space, so just getting access was a massive challenge for all but institutional players.
But in recent years, there has been a proliferation of alternative investment platforms that enable financial advisors to align access to alternative assets with their clients.
While this seems like a positive development, access to alts is just a starting point. There are multiple additional issues to consider, and not every alts platform is well positioned to support advisors with them. Consider the following:
• Quantifying appropriate alts exposure to complement traditional 60/40 portfolios. How do you quantify the appropriate level of alts exposure that a client should have relative to traditional portfolio models? Answering this pivotal question requires working with a platform that provides high-level analytics, something most alts platforms don’t offer, while many other alts platforms charge financial advisors extra costs to utilize their analytical tool suite.
To successfully align alts with their clients, financial advisors need to seamlessly benchmark funds against existing portfolios and against other funds in the same universe. This should include both simple and advanced analytical tools that allow advisors of all skill sets to benchmark with ease. Advisors may want to upload current client portfolios and measure the effects alternatives can have on their risk/return metrics. Or they might want to see how funds on the platform match up against each other. Regardless of the analytic details, alts platforms need to deliver a one-stop destination for shopping, comparing, buying and managing alts.
• Managing alternatives post-sale. Managing alternatives post-sale can be cumbersome. Typically, after someone buys an investment, the broker/salesperson gathers their commission, disappears and moves on to the next sale, never to be heard from again. Unfortunately, due to the profile of alternatives, the asset class cannot receive the same treatment. From the illiquidity of alternatives, to the rebalancing of portfolios, financial advisors need a comprehensive level of post-sales support.
• Juggling the volumes of paperwork associated with alternative investing. Investing in alts requires a tremendous amount of work to successfully manage subscriptions, redemptions, rebalancing, liquidity, capital calls, distributions, statements, K-1s, and other key operational requirements that go into building and maintaining alternative investment portfolios for clients. Transactional platforms, given their multiple feeder structures, are forced to issue these statements one by one, client by client. This can create an avalanche of administrative burdens, given that most clients don’t invest in just one alternative fund.