Want to get the most out of alts? You’ll have to do your homework

The most significant gap in alternatives (alts) investing today isn’t a lack of knowledge – it’s a lack of experience.

While alternatives aren’t exactly new, their growth in recent years has made them more accessible than ever. Institutional investors and advisors have tapped into private markets for decades, and there’s no shortage of information about them. But despite this increased access, many investors still lack a deep understanding of how alts function in real-world settings.

Much of the conventional wisdom surrounding alts today likely stems from a time when these assets were structured very differently. If you’ve encountered alternatives before, it may have been through liquid ‘40 Act funds – vehicles that cater to a liquidity-driven market. These structures, though useful, often undermine the performance potential of the underlying alternative assets.

For many alternatives, illiquidity is not just a feature – it’s a core part of their value proposition. To meet the liquidity requirements of a ‘40 Act fund, something must be given. The underlying assets may be forced into short-term holdings that conflict with the long-term strategy or, even worse, sold prematurely, long before they have a chance to mature fully.

On the advisor side, it’s one thing to communicate the inherent illiquidity of alternatives to clients, but it’s another to ensure they truly understand how bundling these assets into liquid structures may erode their value. Clients may have expectations that don’t align with reality, and without proper education, they might not appreciate the time it takes for the J-curve to unfold.

Advances in technology and the rise of alternative marketplaces have done much to break down access barriers and present alternative investments in ways that highlight their strengths. But unlike traditional securities, alternatives are not a plug-and-play asset class. Advisors must go beyond understanding basic strategy and performance; they need to dig into the specific terms and covenants that shape these investments.

Unlike traditional stocks and bonds – where fees tend to be transparent and standardized – alternatives often come with layered costs that can erode value if not properly scrutinized. Advisors must carefully review the fine print and relay this information to clients, especially those who are more focused on their broader financial goals than the specific mechanics of the assets that drive those goals.

The surge in access to alternatives has also created a rush of managers targeting a fragmented RIA channel, where barriers to entry are low, but many RIAs lack the policies, procedures, and human capital to navigate these new and complex products – let alone the experience required. This is happening as managers face a decade of pricing pressure and margin contraction across traditional asset classes. The saturation of registered products has overwhelmed advisors, forcing them to perform due diligence on unique investment strategies, unfamiliar vehicle structures, and the operational complexities that can lead to trading errors.

This isn’t a message of pessimism, but one of caution. Many modern platforms are doing a commendable job educating investors on the structure of alternative products and specific investment options. But this doesn’t absolve advisors of their responsibility. Our role is to continue educating ourselves – and our clients.

The reality is that the returns we’ve come to expect from public markets will be harder to come by. Alternative assets are going to become an essential part of the advisor toolkit, but only if we understand what makes them work. In fact, much of the product hitting the market right now may not.
 

Eddy Augsten is president of Concurrent Asset Management.