Investment Insights

Jeff Benjamin

New platforms for alternatives trading miss the mark

Smart money should be focused on finding ways to help advisers first navigate the liquid alts world

Dec 14, 2014 @ 12:01 am

By Jeff Benjamin

With the financial advice industry increasingly tuning in to the concept of alternative investments, it's no surprise that the broader financial services industry has been tripping over itself to provide creative new entry points.

A couple of recent efforts include Aequitas Capital Partners, which is offering access both to capital and alternatives, and Circle Squared Alternative Investments, which is offering outsourced alternative investment management.

The relative newcomers join an already eclectic list of platforms aimed squarely at the advice industry, with sales pitches that promise access to some of the far reaches of alternatives, including private equity, private real estate, private credit strategies, hedge funds and various private-placement offerings.

Those pitches may be music to the ears of institutional managers at pension funds and endowments. But most financial advisers aren't that advanced yet, and a large number will never get to a point where they're looking for such complex and illiquid investments for their clients.

“I think those kinds of platforms are all fighting the last war,” said Bob Rice, managing partner at Tangent Capital.

While there is much to be said for being ahead of the curve, it is possible many of the platforms hoping to attract financial advisers are woefully off the mark — especially considering how the asset management industry has evolved over the past half-dozen years to make alts more user-friendly and accessible to retail-class investors.

The universe of registered mutual funds applying a wide range of alternative strategies has swelled to more than $310 billion in nearly 600 funds, according to Morningstar Inc. Category assets are up from $268 billion at the end of last year and have more than doubled since the end of 2011, when there were 287 liquid-alts funds.


Making the case for more exposure to strategies designed to hedge some of the risk accumulating in the traditional stock and bond markets gets easier with each passing day — or the next uptick of the equity markets.

But with alt investments having an estimated penetration rate of only 5% across the advice community, offering access to private equity is too big a first step for most.

Jeffrey Sica, founder and president of Circle Squared Alternative Investments, makes the same solid case for alternatives that you'll hear virtually across the platform and product-provider space.

“You will either embrace alternatives now, or you'll try to embrace them when the market is in free fall,” he said. “Right now, with the equity markets moving steadily higher, a lot of advisers are taking the path of least resistance and are abandoning alternatives.”

Mr. Sica, along with seemingly everyone else in this space, recognizes the gap of education and understanding when it comes to alternatives. And like most firms in the alternatives camp, Circle Squared has its share of pro-alternative data points and white papers to support the argument.

But still, the first step in drawing nonbelievers has to be much smaller and less mysterious-sounding than something that begins with the word private.

“What I saw in the independent adviser world is that they didn't have access to a lot of the more innovative alternatives that were usually only available to select wealthy investors and family offices,” Mr. Sica said in making the case for his sophisticated lineup of product offerings.

It can sound so logical because it harkens to so much of the evolution of the hedge fund industry, which grew large and popular by making the best use of the appeal of exclusivity.

But most financial advisers don't think that way, because the majority of their clients are still more focused on climbing the mountain than planting a flag on top of it.

With that in mind, as Mr. Rice put it, “the sweet spot is liquid alternatives.”

That's not to say liquid alts is not an area full of challenges. There are short track records, higher fees and wildly dispersed performance within and among the various subcategories.

But for financial advisers who are still residing in the reluctant camp, a registered mutual fund deploying a long/short strategy represents a much smaller step up and into the space than a move into a fund investing in exotic private credit strategies.

As platform opportunities go, it seems like the real smart money should be focused on finding ways to help financial advisers first navigate the liquid alts world.


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