Publications

- June 1, 2021: Vol. 8, Number 6

Roundtable: Putting alternatives into investor portfolios

by contributing executives

What do you believe the proper percentage of alternatives should be in client portfolios and — if that target is not being met — what impediments are preventing the target from being reached?

 

Richard Gann, managing partner, 1031 Capital Solutions

For high-net-worth investors, the proper allocation could be as high as 40 percent. Yet there is an inherent industry bias against alts.  “Alternative” intentionally has a negative connotation, as when applied to nouns like “medicine” or “lifestyles.” Wall Street further marginalizes alts by propagating the myth that liquidity mitigates market risks — in reality, liquidity is the fuel of market volatility. Only nontraded vehicles offer performance correlated directly to underlying assets. Until wirehouses, large RIAs and regulators start thinking outside the conventional box, many investors will be offered little beyond traded REITs and ETFs to satisfy their “alternative” allocation.

 

Elliott Orsillo, principal and CIO, Season Investments

There is no one-size-fits-all answer to this question as clients have different investment objectives, risk tolerances, and liquidity needs. For suitable clients, a meaningful allocation of 20 percent or more to alternative investments can be warranted to reap portfolio-level diversification benefits. There are several impediments to clients reaching this target, including the comfort level of their adviser, the due diligence and regulatory burden, concentration risk due to investment minimums, and access to high-quality opportunities that diversify the risks already expressed in the liquid investment portfolio.

 

Mike Phillips, partner and CEO, PREP Property Group

Regardless of investment objectives, volatility will always play a role in overall performance of a portfolio. Alternative investments can provide a degree of balance in a portfolio and smooth volatility. These types of investments tend to be less liquid, which can be a positive characteristic. During times of volatility, liquid investments tend to be sold at the low end of their value. Alternative investments that take a longer investment outlook tend to be more recession proof and less volatile in a down cycle.  In my book, a comfortable, safe and balanced portfolio would have 20 percent to 25 percent in alternative investments.

 

Nikita Brodskiy, chief strategy officer, The Entrust Group

The current state of the private capital markets calls for at least a 20 percent allocation to individual investment portfolios. Self-directed investors in average hold $120,000 in alternative assets that generate 11 percent in annualized returns — almost twice as much as public benchmarks. A balanced approach to investments and appropriate due diligence on alternative assets minimizes the risk of the overall portfolio. As a result, investors are better off on both risk and return with alternatives when compared with any publicly traded investment strategies.

 

Clive Slovin, president and CEO, SFA Holdings

Illiquid alternative investments are not one-size-fits-all and should be considered on an investor-by-investor basis. Generally, an alternatives allocation of less than 5 percent will not sufficiently impact a portfolio. More than 30 percent could pose more risk than is appropriate for a particular investor. Alternatives are long-term, often presenting access to unique opportunities, and they are not market dependent so they can offer a hedge against volatile markets. While their complexities require specialized due diligence and may prompt additional scrutiny from regulators, alternatives can be an important part of a diversified portfolio. They should be seriously considered by advisers who are interested in structuring comprehensive investment portfolios for their clients.

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