Prime Services’ Lisa Lewin discusses considerations for greater access to alternatives in the advisory community.
Hedge funds increasingly are marketing their products to registered investment advisors to generate capital and diversify their investor base. On the flip side, RIAs are using alternatives as a way to differentiate themselves from the competition. Click the links to below to learn more about the opportunity for alternative strategies among RIAs.
Why have we seen an increased mutual interest by hedge funds marketing to RIAs?
In working with hedge fund managers post the financial crisis, we've seen a number of changes in the industry. One of these changes has been how hedge funds have marketed themselves and looked to raise capital. There has been an increased desire by hedge funds over the last 18 months to two years to market to registered investment advisors. Hedge funds view this as a way to both raise additional capital, but also to diversify their investor base. For advisors, as their industry becomes increasingly competitive, investing in alternative strategies can be a way for them to differentiate themselves from their peers.
Both advisors and their clients are seeing that having exposure to alternative strategies is important for a several crucial reasons. It provides portfolio diversification, downside protection in the event of market volatility, uncorrelated exposure to the equity and fixed income markets, and finally, it's a way to provide alpha generation.
What are the typical challenges hedge funds have faced in marketing to RIAs?
As hedge fund managers have looked to market to registered investment advisors, there have been a couple of key challenges they have faced. The first is that there is still a need for more education and information among the advisory community about alternative strategies – both why they're important and how advisors can source managers and perform due diligence on different hedge fund managers. The second key challenge is around distribution. Hedge fund managers have traditionally marketed their products to institutional investors. The registered investment advisor space looks very different than the institutional space in that it's much more fragmented. This makes it challenging for hedge fund managers to identify the right advisors to speak to about their products.
What are some of the common misperceptions that advisors might have about alternative investment strategies?
Some common misperceptions that advisors have about hedge funds could come from the negative headlines that they read about them. Whether it's that they're expensive, illiquid, or that their sole function is to provide outsized returns. Additionally, a lot of advisors and their clients are now realizing that alternative strategies play a number of key roles in the asset allocation model. However, advisors can benefit from fee compression in the hedge fund industry as well as the fact that a number of hedge fund managers now offer their strategies in more liquid structures.
Why should advisors consider alternative strategies as part of a well-diversified asset allocation model?
Advisors should consider alternative strategies as part of a well-diversified asset allocation model for several key reasons. They provide portfolio diversification, downside protection in the event of market volatility, uncorrelated returns from the traditional equity and fixed income markets, and finally, they can provide alpha generation.
What are the typical challenges advisors have faced when trying to invest in alternative strategies?
The typical challenges advisors have faced when trying to invest in alternative strategies have been around access. Since alternative strategies have traditionally only been available to institutional investors, there are not a lot of strategies available in structures that work for the advisor channel. However, more hedge fund managers are now creating structures, such as REITs, interval funds, and BDCs, which make it easier for advisors to access these strategies. Additionally, platforms are also making it easier to access alternative strategies and they're helping with some of the areas that had been a challenge to advisors. For example, a number of platforms will help source and vet managers, perform due diligence on these managers, and provide a streamlined subscription process.
How do alternatives managers reach interested investors and educate RIAs about their strategies?
Over the past several years, we have helped hedge fund managers gain visibility with advisors through events like INSITE, which is Pershing's premier client conference, and other hosted events across the country. These events provide a great opportunity for managers to help educate those advisors who are interested in learning more about how to access alternative investments.
Lisa Lewin is a Director for the Prime Services division of BNY Mellon | Pershing and is responsible for new business development and managing existing relationships with hedge funds and other alternative asset managers. Lisa participates in a number of speaking engagements aimed at educating investors on the benefits of including alternative strategies in their portfolios.