As troubles emerge in the public markets, three largely illiquid options should be back on advisors’ radar
A new white paper from BNY Mellon Pershing argues that because of the return of volatility and increased correlation across asset classes, advisors should consider non-correlated assets — particularly alternative investments — for their clients’ portfolios.
“Correlation is one reason institutional allocations to alternative investments have increased quickly, with assets under management hitting a record US$7.7 trillion in late 2017,” the paper said.
The report noted that alternative investment options are becoming more accessible to the broader market. Citing figures from Preqin, the report noted that the performance of real estate, private equity, and hedge funds matched or exceeded the expectations of the investors in each asset class (89% for real estate, 95% for private equity, and 72% for hedge funds).
In the case of real estate, the report recommended exposure to REITs, because of their diversification benefits and income potential. “REITs are affected in the short-term by rising rates but, historically, over the long term they’ve performed very well,” said Bill Miller of CCO Capital, who recommended industrial REITs and single-tenant office REITs in the report as high-demand areas. “[A]dvisors should be looking at REITs that have buffers and cushions.”
Focusing on private equity, BNY noted a consensus among experts that the space has gotten less opaque. It’s also moving forward thanks to increased operational ease and a desire among asset managers to reach mass-affluent investors.
“Private equity not only has the potential for straight-up [return] performance but also it’s a solid diversifier,” Matt Brown, founder and CEO of alternative-investment platform CAIS, noted in the report. He added that information about and access to private equity funds become more widely available.
As for hedge funds, the report said hedging strategies are coming down from their multi-million-dollar minimums, with several firms introducing fund-of-funds and interval fund structures to accommodate mass affluent, accredited clients.
“We don’t think it’s fair that someone who has US$500,000 to invest should be shut out of the access a US$5-million client has,” said Casey Wamsley, senior vice president of Infinity Capital Partners, who touted hedge funds’ ability to dial back long-only risk and capitalize on market opportunities. “However, there are a lot of hedge fund and other alternative strategies that may not be appropriate for clients with smaller accounts.”
Because of rising interest rates and rekindled market volatility, many hedge fund firms are also working with advisors in a more consultative fashion than in the past. At Wamsley’s firm, he said the discussions revolve around the return expectations for different alternative vehicles and structures, as well as liquidity and funding considerations.
“Now more than ever, advisors have to be able to clearly explain these concepts and strategies to their investors,” he said.