Alts are rockin’ the house!
April 8, 2022 | Ryan W. Neal | Investment News
While the biggest bands of the 1960s were The Beatles and The Rolling Stones, the decade also saw the emergence of so-called “alternative” acts like The Velvet Underground and Iggy Pop & The Stooges offering different takes on rock ‘n’ roll. The 1970s saw alternative sounds crystallize into new genres, and college radio stations in the 1980s created a larger market for them, paving the way for Nirvana’s 1991 album “Nevermind” to finally push alternative music to a mainstream audience.
Thirty years later, the financial services industry seems ready for its own version of alternatives to push into the mainstream. Just as alternative music attracted fans looking for something different from popular radio hits, alternative investments give wealth management firms a way to stand out from the crowd in a world of increasingly commoditized investing, said Doug Fritz, co-founder and CEO of consulting firm F2 Strategy.
“[Alternatives] can be different and unique and provide something to a prospect that they can’t get anywhere else,” Fritz said. “It’s like the Kirkland brand of vodka — maybe it’s Grey Goose. No one can tell. But if I don’t have my own handmade vodka crafted with baby tears, no one is going to work with me.”
Demand for income, inflation protection, enhanced returns and volatility dampening has created what research from Cerulli Associates calls a “Goldilocks moment” for alternative investments. Financial advisers are allocating an average of 14.5% of portfolio assets to alternative investments and plan to increase the portion to 17.5% in two years, according to a survey conducted by Cerulli and Blue Vault Partners, an alternative investments researcher.
While the numbers should be taken with a grain of salt, with actual growth probably being closer to single digits industrywide, the data still indicate an asset class hitting its stride, said Daniil Shapiro, director of product development at Cerulli.
“Our polling across both this and our broader adviser survey shows that advisers are planning to increase alternative investment allocations,” Shapiro said. “And this is certainly carried through via adviser assets that are invested in these exposures.”
Challenges still exist for many advisers, but the demand has led to a proliferation in the number and types of products available.
And companies looking to solve the problems for advisers have attracted significant investments. CAIS and iCapital, two digital marketplaces that are like the Amoeba Music and Tower Records of alternative investments, are valued, respectively, at $1.1 billion and $6 billion.
Independent advisers are seeing an influx of marketing materials from new platforms offering access to alternatives, said Jeffery Nauta, principal and chief compliance officer of Henrickson Nauta Wealth Advisors, a hybrid RIA based in Belmont, Michigan.
“A day or two doesn’t go by that I don’t receive an email on an investment offering from one of those platforms. A lot of these platforms have some type of tech, but some are just quasi-placement agents,” he said in an email. “Along with that, we’re seeing pitches to increase allocations to alternatives along with opportunities for education on various alternatives.”
But just as alternative music never totally took over the airwaves, some advisers are less bullish on adding alternative investments to portfolios.
“The more a product sponsor has to spend on marketing, the crappier the product is,” said Rene Bruer, co-CEO of Smith Bruer Advisors, a fee-only RIA operating out of Tallahassee, Florida and Colorado Springs, Colorado. Bruer has received invitations to weekend getaways hosted by alternative asset managers but sticks to traditional strategies from Dimensional Fund Advisors.
“The good products over time stand on their own,” he said. “They’ve been around for decades upon decades, stood the test of time and it works.”
Because while drinking at clubs and tickets to concerts — sometimes for music that people haven’t even heard of — may have diminished some music fans’ life savings, it never came close to toppling the global economy as derivatives linked to mortgage-backed securities did in 2008.
IN THE BEGINNING
“Alternative investments” is a broad term that generally refers to any investment that isn’t cash, stocks or bonds. While the term is relatively modern, private-capital-type investments can be traced back to the industrial revolution, according to Preqin, a company that provides data and analytics on alternatives. Venture capital investments in private markets rose to prominence following World War II, the first hedge fund launched in 1949 and boomed in the 1970s, and leveraged buyouts and private equity became staples in the 1980s.
