Personalization will be key to opening up alternatives to private wealth – CAIA

June 18, 2024 (Preqin News) – Private markets are poised to ride a ‘second wave of democratization’ as more of the $150tn of household net worth flows into alternative assets. However, they risk failing to capitalize on the opportunity and deliver results that meet investors’ expectations, according to CAIA.

In a new report, Crossing the Threshold: Mapping a Journey Towards Alternative Investments in Wealth Management, industry body CAIA says private market participants will need a different approach to the one taken with hedge funds after the Global Financial Crisis (GFC).

‘Liquid alternatives, as a category, left many investors wanting more,’ wrote Aaron Filbeck, Managing Director, Head of UniFi for CAIA. ‘Less flexibility, leverage, and illiquidity, combined with mismatched expectations, resulted in many investors realizing lower returns than they had anticipated from the funds.’

Filbeck noted that hedge fund growth has been slower than private capital since the GFC. Assets under management (AUM) in private capital has grown fivefold from $3.1tn in December 2010 to $15.3tn as of September 2023, the latest date for which Preqin has data. By contrast, hedge fund AUM grew 3.3 times over the same period, from $1.3tn to $4.4tn.

CAIA says that the industry needs to put the goals and needs of this different kind of customer first. ‘Do not believe for a moment that the FIG (Financial Institutions Group) forces will simply continue to serve up the low-fee and commoditized fare of the public market options in the typical and now dominant DC retirement plan, nor should they,’ said William J. Kelly, CEO of CAIA.

‘Successful and sustainable outcomes must be far more nuanced, specific, and thoughtful. Simply changing the definition of an accredited investor, or the repackaging of sophisticated product into leaky wrappers, puts FIG asset gathering at a premium, over the discerning wealth building (and preserving) needs of the consumer of their offerings.’

In an article in the report, Sylvia Kwan, Chief Investment Officer at Ellevest, said the plan of combining strategies – including real estate, private equity, and hedge funds – into a single ‘alternatives’ bucket, which can be slotted into a model portfolio of stocks and bonds, was a good start. However, moving to ‘employing a goals-based framework when constructing portfolios with alternatives can reap greater benefits for investors and advisors.’

_{The opinions and facts included within the above do not constitute investment advice. Professional advice should be sought before making any investment or other decisions. Preqin providing the information in this content accepts no liability for any decisions taken in relation to the above.}