Advisers exploring alternative investments need to ensure they are viewing investment vehicles in proper context and are setting the right expectations with investors, according to a white paper by BNY Mellon’s Pershing.
The paper, The alternative advantage: Is now the time to take a new look at alternative investments?, outlines key questions advisers should ask when deciding whether or not non-traded REITs, private equity and hedge fund investments are right for their clients.
Key recommendations for advisers include:
Revisit REITs.
While non-traded REITs have experienced slow growth in the past few years due to lack of recent product development and previous uncertainty around the Department of Labor conflict of interest rule, sustained economic growth moving into 2019 has fueled an argument for non-traded REITs as a diversifying and income-adding portfolio element.
The paper suggests that advisers looking into REITs should consider those that have buffers and cushions against rising rates. Additionally, REITs that feature tenants with mature business models and staying power could translate to more stability as rental spaces may stay occupied for longer periods of time.
Take advantage of private equity’s newfound transparency and access.
Advisers looking to allocate investor funds into private equity face fewer operational barriers to entry than ever before. The paper states advisers looking to help their clients diversify into private equity, however, should know specifically what they are diversifying against.
“Before advisers secure access to a private-equity fund, it’s critical for them to take time to perform thoughtful due diligence,” said Justin Fay, director of financial solutions at BNY Mellon’s Pershing. “These learning opportunities not only allow advisers to better understand exactly what’s on the diversified menu of funds, but also decide whether it’s the right fit for their client.”
Do more to set investors’ expectations of hedge funds.
According to Preqin’s Investment Outlook on alternative assets, three in 10 investors felt that hedge funds did not meet their expectations.
Rather than bundling vehicles into an “alt bucket,” the paper recommends that advisers create a clear strategy — they may find that hedge funds can fill a needed niche in a portfolio against current market outlooks of low yield and high volatility.
“Above all else, it’s critically important for advisers to know what’s currently available, understand what’s under the hood of what they are recommending, and determine the right risk/reward combination for each client based on such factors as objective, risk tolerance and suitability,” said Fay.
