Before making a decision, advisers must evaluate what a client wants from alternatives, as well as their capacity for risk and liquidity.
Advisers should look beyond a one-size-fits-all approach for clients when it comes to investing in alternatives.
Rather, they should have a conversation around what a client is seeking from such an alternative investment, as well as capacity for risk and liquidity, before deciding how to invest client money in such a strategy, according to executives who spoke Tuesday at the fifth annual InvestmentNews Alternative Investments Conference in Miami.
The decision regarding where to invest in liquid alts, and whether it's through a daily liquid mutual fund vehicle or something more illiquid, begins with the question of why a client is investing in alts, said Ben Rotenberg, portfolio manager at Principal Management Corp.
For example, if a client seeks returns but not as much liquidity, private equity may make most sense, while if a client wants liquidity and low volatility, a liquid alts mutual fund-of-funds is more appropriate, Mr. Rotenberg said.
“Not every hedge fund strategy is liquid. As an adviser, if you're putting your clients in liquid alts, one of the things you need to do is due diligence on what types of strategies are in these products,” said David Katz, president and chief operating officer at Larch Lane.
Certain strategies that use commodities, currencies, stocks, bonds, are more liquid, for example, but some with other kinds of holdings could be much less liquid, he said. “The reality is having daily liquidity cuts you out from certain [alternative] strategies,” Mr. Katz said.
Some alternative strategies work well within '40 Act investment vehicles while others don't, and many managers have been trying to decide which vehicles lend themselves most naturally to their offering, according to John Grady, chief strategy and risk officer at RCS Capital Corp.
For example, a strategy that uses high leverage likely wouldn't be suited to a '40 Act vehicle, because there are leverage constraints through such vehicles, he added.
“We're seeing a lot of strategies starting to pick and choose,” Mr. Grady said, equating it to “speed dating.”
There's been a push across the asset management industry to make inherently illiquid strategies into more-liquid structures, but that could water down the nature of the returns on a particular strategy, or fundamentally change the way managers go about achieving returns, according to Walter Davis, alternative investment strategist from Invesco.
“I think a lot of it comes down to provider and being familiar with the needs of the retail investor,” Mr. Davis said.
Long-short funds, for example, don't typically require much tweaking to go from a typical hedge fund to a more liquid vehicle, whereas that would be much more difficult with something like a distressed-credit hedge fund, Mr. Rotenberg said.
