How to ensure alts exposure adds value to your portfolio

As private market assets have increased in prominence in recent years, advisors are also increasing asset allocation in alternatives to clients’ portfolios.

As several advisors told InvestmentNews, clients have been asking more and more for alternatives to be in their portfolios, which means advisors have to consider private markets as part of their portfolio.

“Clients are just not satisfied with the standard 60/40 stocks and bond portfolio. Companies are staying private much longer and we recognize that as well,” said Aaron White, chief growth officer and wealth advisor at Adero Partners.

Over the last several years, Adero has built out a “defined approach” to delivering alternative investments consistently and predictably, White says, because they have established relationships with ongoing funds.

“They’re open every year and a half so we can build out what that ramp looks like as you're first introducing private equity, private credit or real estate to a portfolio,” he added. “As you build that allocation through capital calls, how does that look three years from now? Five years from now? How do we manage the cash flow around our clients’ lifestyle?

“We've really spent a lot of time building out the alternatives platform for our clients and have gotten really good reception and really good results for them,” White said.

A report released from KKR earlier this year found that family offices expect 52 percent of their portfolios to be invested in alts, up from 42 percent in 2022. Those surveyed said they were most focused on investing in private credit, infrastructure, and private equity.

Marti Marache, founder and CEO of Harbor Asset Private Wealth, said she specializes in alts because it allows her to keep exposure to the long US equity market but to also have something that's going to reduce the risk in the portfolio that allows it to be more conservative.

“I use a barbell strategy where I bracket my long equity exposure with my alternative investments exposure and it allows me to get further faster in the portfolio, making it a smoother and more comfortable ride for the investor,” said Marache.

The “beauty of alts”, Marache says, is someone can look at the menu and depending on what's going on in the world and in the markets at any given time and decide, ‘Okay, this might be appealing and this might be the most appropriate, given where we are in the interest rate cycle.’”

She also believes alts aren’t risky but rather illiquid. “To me, alts reduce the volatility and the risk in the portfolio. They give more stability and more predictability,” she says. “The only thing that it doesn't do is increase the liquidity.”

The problem with alternatives, Lori Van Dusen, founder and CEO of LVW Advisors says is a lot of advisors have little to no exposure to them.

“They want a simple solution. What I would say is it's not that simple. You can't just throw them in a portfolio and expect magic to happen. It's not how it works. You really do have to unpack and understand the sources of return and the risks and how those marry with your stock and bond or real estate portfolio.”

She suggests advisors “go under the hood” and figure out what it is that they’re trying to accomplish with their portfolios.

“Look at your portfolios now and say, ‘Okay, what can powerfully diversify this portfolio? How do I add value by putting this in the portfolio and really understand it?’,” Van Dusen added.

Marache highlighted that she’s started to invest in real estate in Nantucket because the tiny island off Cape Cod, Massachusetts, has turned over almost 2 billion in real estate in a year and a half, which she says is a tremendous opportunity for 10/31 exchanges.

“I thought if you're going to look at an environment where people could really benefit from alternative investments, it would have to be in a place like Nantucket that has had a super high dollar amount of turnover in sales,” says Marache.

She suggests rather than buying another property that one may or may not want to manage or deal with to instead exchange the property into a fund, then buy a 10/31 exchange bond into an UPREIT.

“99 percent of realtors are not aware of these funds you can do,” she added, noting the median price in real estate in Nantucket is around $2 million.

“I talk to my clients a lot about real estate and diversifying their assets,” said Marache. “Because if they have everything in the public equity markets, then that's not always good either. It's nice to have a mixture of some private market exposure as well as public market exposure.”