While recent studies have indicated a burgeoning demand for alternative investments from the client side, accessing the relevant products has proved “very problematic,” explains Matt Brown of CAIS.

While recent studies have indicated a burgeoning demand for alternative investments from the client side, accessing the relevant products has proved “very problematic,” explains Matt Brown of CAIS, the New York-based alternatives investment platform provider which launched in 2009 and has since seen assets grow by 20 per cent month-on-month.

Although "alternative investments" is a difficult term to define absolutely, it broadly refers to “non-traditional” asset classes such as hedge funds, private equity, real estate and precious metals, as opposed to stocks, bonds and mutual funds, for example. 

Ultra high net worth investors are planning to allocate an increasingly large share of their portfolios to alternative investments, as highlighted by the Institute for Private Investors in its annual Family Performance Tracking survey earlier this year. Yet findings from a recent PENSCO survey showed that, although eight in 10 advisors said their clients have expressed an interest in investing in alternative assets, a mere 10 per cent of advisors actually offer that capability.

One problem, according to Matt Brown, CAIS chief executive, relates to the structure of the alternative investment community, which in terms of product format is “all very institutional in nature” and “doesn’t necessarily correspond with how an advisor needs that product delivered,” he says, speaking to Family Wealth Report.

A "gap in the market"

CAIS identified that only the biggest institutions - such as the global private banks - had the platforms required to invest in alternative products, as building and running a platform is expensive. 

The firm therefore wants to level the playing field between the big private banks, wirehouses and the “everybody else group,” so that all advisors - regardless of the institution or size of their firm - have the same access to a “qualified menu of alternative investments.”

“The big banks were using their platform as a competitive tool, as a competitive offering,” Brown explains. “But unless you work for one of the large institutions, and let’s say you were an IFA, IRA, mid-size private bank or wirehouse, you didn’t have the same product line because you didn’t work for an institution that spent the money to build the platform, so you are immediately at a disadvantage.”

However, all of the funds on the CAIS platform have investment minimums of $100,000, as opposed to, say, $5 million or $10 million. This enables advisors to connect to, for example, ten alternative investment funds for $1 million of investable capital – an amount which otherwise wouldn’t get them entrance into one fund.

Identifiable trends

Brown notes that CAIS is seeing a “large demand for hedge funds,” followed by demand for tangible assets such as physical gold, silver and other precious metals, in a format which doesn’t require investing “enormous amounts of money.” There is also a rising demand for private equity.

Within the hedge fund industry, assets and funds declined amid the 2008 financial crisis, but this sector has bounced back and “possibly even surpassed those heights,” Brown says. “We anticipate this trend to continue.”

SEI’s Fifth Annual Global Survey Of Institutional Hedge Fund Investors recognizes that 2011 was “an uncommonly rough one for hedge funds, and yet they have continued.” 

Similarly, a recent report from Chicago’s Hedge Fund Research revealed that investor capital allocated to hedge funds in the first quarter this year surpassed $16 billion. Overall, the industry now holds a record total of $2.13 trillion assets.

Gold

Meanwhile, the exchange-traded fund industry has stirred up demand for precious metals as a way for investors to diversify assets and this sector is still growing apace, but a further trend observed by Brown is that many investors are turning to physical ownership instead.

Last month, CAIS added precious metals to its product offering as part of a joint venture with Gold Bullion International. “Accessing gold bullion has been difficult for the wealth management community, which is often limited to ETFs, gold mining stocks or paying high premiums to acquire gold coins,” Rafay Farooqui, president and co-founder of CAIS, said at the time.

Figures released by the World Gold Council in February revealed that global demand for gold rose to an all-time high in 2011 following record investment demand, which exceeded $200 billion.

The global picture

This picture is global, says Brown, as demand for alternative investments is “growing strongly” in core financial centers such as New York, Singapore and Zurich, while regional trends in the US mark “an exodus of advisors from larger private banks and wirehouses to independent platforms.”

Additionally, wealth transfer to Asia from Europe is “pressuring Asian wealth management firms to meet client demand for services,” and gold is currently the most favoured hedging instrument among Asia-based wealth managers and their clients, according to a Barclays survey released last week. Last year, on the other hand, equities were the most commonly used product.

Due diligence

The concept of due diligence is climbing the ranks in terms of what advisors consider most important, and Brown emphasizes that a “strong framework” of due diligence when looking at any investment is essential – especially within the alternatives arena.

“Advisors have to be able to do their own due diligence, or rely on a platform like CAIS, which has partnered with Mercer to oversee platform due-diligence. They have to have access to information... integrated reporting, and then they have to have ongoing education and product support so they’re up to speed with what’s going on with these products.”

In fact, SEI’s global hedge fund study found that almost one-third of respondents said they had changed their due diligence processes over the previous year.

Despite the hurdles facing the industry at present, Brown says that opting for alternative products is “becoming easier every single day and will continue to.” Meanwhile, CAIS is expanding its product line both in terms of funds and products offered, as well the various structures, so as to attract a more diversified audience.