Alternative investment industry has to ascend, says association

CAIA unveils new guiding principles as sector faces unprecedented demand for professionalism

Alternative investment industry has to ascend, says association

The CAIA Association believes that the time has come for the alternative investing sector to become more open and client-focused.

The 20-year-old alternative investment industry professional association has come out with a new set of guiding principles, with the goal of enhancing the professionalism in the sector.

The committee recommends that, among other things, investors modify their perspectives on allocation and look beyond the internal rate of return, or IRR, to gauge success, reported Institutional Investor.

This set of guidelines aims to assist investors in putting CAIA's earlier alternative investing paradigm, known as the Portfolio for the Future, into practice.

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According to that framework, CAIA anticipated that investing in private markets was about to shift and would get harder in the future. The dynamics of alternative investment are changing as a result of this slump.

The denominator effect affects allocators as they wait for private investment firms to lower the valuations of their portfolio companies.

This happens when private investments seem to occupy a higher share of an asset owner's portfolio while public market returns have decreased, pushing those allocations above their predetermined targets. Due to this, some asset owners are unable to increase their investments in private assets.

Despite not yet exhibiting the same drop as public markets, private investment prices are anticipated to do so. Some investors, as well as their boards, may reconsider how they invest in private markets if those valuations decline.

Read more: Are the private markets at a tipping point?

“The need for professionalism has never been more critical,” CAIA’s report said. “Generational headwinds in capital market expectations, inflation, and interest rates combined with a voracious appetite for exposure to less liquid, more complex, idiosyncratic asset classes and strategies are raising the bar for professionals in all corners of our industry.”

The new CAIA set of principles states that alternative professionals must regard investors as true partners, treat liquidity as a feature, and customize sustainability initiatives to clients.

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By providing personnel with the right training and credentials and ensuring that customers are positioned adequately for the market headwinds they are facing, Bowman said CAIA hopes to encourage the alternatives investing industry to step up its game.

CAIA encouraged investors to reconsider liquidity as well. According to the principles, the sector is being warped by the "fetish of the marketplace" for liquidity.

This requires investors to reject unneeded illiquidity and to be aware of the dangers of making investments in liquid vehicles that are backed by illiquid assets.

CAIA also contends that transparency is the most important factor for both allocators and their general partners.