Comms is the next frontier for alts
By Eva Rana
‘Alternatives’ is admittedly a bit of a catch-all within the universe of investable asset classes. You could use them to mean ‘anything but’ traditional assets like stocks and bonds, so they’re usually seen as a diversifying tool for when public markets are down. By this definition – art, fine wine, jewellery, luxury handbags all qualify as ‘alts’ – but for technical purposes, it refers to investment structures (typically funds) that allow indirect access to a mix of such assets.
This includes private markets and real estate which are classed as ‘illiquid’ alternatives because they can’t be frequently bought or sold for cash. Then there’s the infinitely more confusing ‘liquid’ alternatives – which may sound like an oxymoron, but essentially allows investors to gain exposure to these assets via a fund wrapper/vehicle (e.g. UCITS) that can be freely traded on the market.
Growing understanding of this burgeoning asset class can kick-start a new era of investor interest. And there has never been a more favourable time for investors to consider allocating to such strategies.
Over the past year, market turmoil caused by inflation and rising rates has prompted a major re-think of the ‘traditional’ 60/40 portfolio, prompting private and institutional investors alike to search for returns elsewhere. You’d think this alone would bolster inflows for alternative managers, and indeed Preqin data shows that 2022 was a ‘banner year’ for alts fundraising and performance… until you’re reminded of the regulatory constraints that most hedge funds have carried since 2008.
This is particularly salient for US-based managers who, under the Alternative Investment Fund Managers Directive (AIFMD), are prohibited from direct marketing to private investors in the European Union. But that doesn’t have to spell doom and gloom for alts managers in Europe.
Once you realise that the rationale behind marketing limitations is intimately tied to how deeply investors understand alternative strategies, the case for building a structured communications strategy becomes imperative.
Even if you strip away the lively discourse around outsized risk and returns, the most attractive aspect of their offering actually lies in an ability to proactively leverage ever-changing macroeconomic conditions. Liquid alts have demonstrated impressive entrepreneurialism and flexibility in adapting to this by leveraging event-driven opportunities and allowing investors to ride thematic trends, even in distressed markets.
This gears them to meet the unique demands of different types of investors, allowing the latter to delegate the anxieties of market timing.
This is an invaluable advantage which investors could hugely benefit from, but one that has to be progressively conveyed via targeted information campaigns and a controlled (but consistent) stream of content. It has the potential of positioning alts managers as ‘solutions providers’ rather than firms simply looking to grow AUM by pushing more products.
Indeed some of the most successful global investment managers have started to embrace this ‘educational’ approach as a means of differentiation from competitors – capitalising on the growing investment ‘democratisation’ trend.
Ultimately, alts are no panacea, but they can complement allocations to other asset classes – whether traditional and illiquid ones – thereby enhancing long-term portfolio returns.
The next phase of their evolution now lies in conveying this robustly enough to both placate regulators and appeal investors. The best time to do this is when the tide is high. More precise, fresh terminology could be a good place to start – but no 'alphabet soup' of acronyms please!