SIX KEYS TO FINDING A QUALITY ALTERNATIVE INVESTMENT
little homework upfront and a face-to-face conversation with the fund manager can make all the difference.
MAY 27, 2016
Access to alternative investments has increased dramatically over the last few years. But with more of these products on the market, how do you know which of these strategies will create real, long-term value in your portfolio?
A little homework upfront and a frank and honest conversation with the fund manager can make all the difference.
You’re going to need a high level of dialogue and transparency so that you can set expectations for yourself and for your clients, and you shouldn’t be shy about asking for this.
QUALITY ALTERNATIVE INVESTMENT – Here are 6 principles I follow when investigating a strategy for the first time:
- Be Clear About Your Goals: Before your meeting, have a clear sense of what you need alternatives to achieve in your portfolio. Generally, investors seek alternatives because they deliver returns that are truly uncorrelated to stocks and bonds in down markets. Are you looking for a way to reduce the effects of volatility? Do you need the potential for additional income, along with a reduction in risk? Having these answers up front will help you sort through the options.
- Look for Specialists: In the alternatives space, specialization matters. You want people who have the technical expertise and disciplined commitment to manage what can be complex trading strategies. A firm that offers alternatives as just one of many products may be less committed to that strategy when it matters most. Another telltale sign is how much the firm’s leadership invests in their own funds.
- Demand Transparency: Ask for insight into their investment process and for tools that will help you easily explain the strategy to your clients in different market environments. Will they run scenarios that compare their fund’s impact on your portfolio against that of other funds? How accessible do you think their representatives will be when you have urgent questions? If the strategy is locked in a black box, it’s likely too good to be true.
- Seek a Partnership: You’ll get more value from a strategic partner—one who focuses on your success, not just that of their firm. Do they ask you thoughtful questions about your business, your goals for growing your client list? Do they listen to what you have to say? Or do they focus more on themselves: their analysis, their client base and their point of view? That should give you clues about what your relationship will be like in the future.
- Compare and Contrast: Ask what sets them apart from others in the alternative space. Pedigree, assets under management and cost are just a start. You might also ask if the people who built their strategies also run and manage them. What does their product give you access to that competitors can’t? What proof do they have that their fund will complement other assets in your portfolio?
- Performance: Make sure you look at performance in a holistic way. Their track record, Morningstar rating and asset growth is step one. Then take it a step further by finding out how their fund performs when the traditional markets underperform. Then, evaluate if that fits with your expectations for the role alternatives should play in your portfolio. Do their products truly move independently of stocks and bonds? Is their performance uncorrelated to other alternatives?
Finding a quality alternative can be daunting at first. However, with these questions in mind you can find a fund that’s just the right fit for your needs.