Alternative investment platforms like CAIS and iCapital are offering more advisors access to strategies with fewer hurdles for investors, and regulators are considering opening up some types of alternatives to more investors, with the SEC recently investigating whether some types of private vehicles should be made more widely available. Today, investors have more options to consider when adding an alternative investment—there are now products available from across the entire spectrum of liquidity and transparency, Lake says.
That leaves advisors with the chore of finding the right alternative strategies to suit client needs. Clough argues that investors should demand a certain level of transparency and accessibility from their managers, because the best way to shop around for a good alternative strategy is to build familiarity with the managers themselves.
“How does an advisor find a manager? A prerequisite in any environment is transparency,” Clough says. “We get asked ‘Do you know what XYZ manager is doing’ because people don’t know, they don’t have access to the portfolio. I think investors now need and demand a level of transparency and accessibility, and I don’t think they’re getting either from the behemoth asset managers.”
With perceived weakness in equities, and bond returns looking flat for a long time to come, it may be that more investors will come to recognize the benefits of alternatives in their portfolios. Alternative managers have to meet the challenge of appealing to a different set of investors and advisors than they worked with in decades past, Clough says.
“An awful lot of financial advisors have entered the business in the last 10 years and have seen just a straight-up bull market,” Clough says. “How would I choose an active manager? It’s been easy so far; I’ve been able to offer clients a low-cost way of capturing an index that did better than most active managers. I think that will be harder in the future. They have strong incentives. It’s labor intensive to choose a manager. You have to acquaint yourself with a broad section of managers. Only some of them will have talents that are relevant.”