Evaluating Alternatives in Multi-Asset Class Portfolios

Fidelity Institutional Wealth Adviser explores the opportunities among alternative and public asset classes, highlights the critical importance of manager research, and shares an approach to due diligence for illiquid alternative strategies.

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Key Insights

  • Advisors and home-office CIOs have been increasingly focusing on alternative investments for client portfolios, with their interest driven by technological enhancements making it easier to invest; the growth of strategies that offer access to alternatives with a degree of liquidity to investors of all types; and significant demand from investors for more creative solutions to help them address increasingly challenging investment problems.
  • In addition, increased data availability on alternative investments is enabling more analysis that may build confidence in their utilization for newer allocators; but alternative investments entail many complexities and idiosyncratic risks, resulting in higher dispersion among top- and bottom-performing managers and requiring a rigorous due diligence process.
  • FIWA proprietary research comparing return dispersion between traditional and alternative asset class funds underscores the importance of due diligence when investing in alternative investments, while also highlighting the benefits of diversification.
  • The foundations of a due diligence process for alternative strategies encompass many facets, including analysis of the people managing the strategy, the firm behind them, their overall investment philosophy and process, and the alignment of the portfolio with the stated strategy over time. The terms and fees of the product, performance, and the overall governance of the firm and its funds are also key. But execution of this process is nuanced, requiring unique expertise.
Related Insights
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  • Alternative investments are investment products other than the traditional investments of stocks, bond, mutual funds, or ETFs. Examples of alternative investments are limited partnerships, limited liability companies, hedge funds, private equity, private debt, commodities, real estate, and promissory notes. Some of the risks associated with alternative investments are: Alternative investments may be relatively illiquid. It may be difficult to determine the current market value of the asset. There may be limited historical risk and return data. A high degree of investment analysis may be required before buying. Costs of purchase and sale may be relatively high.
 
 

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