(August 7, 2013) — Too many investors believe they need sizeable allocations to alternatives to get significant gains when success is more derived from how their strategy is implemented, according to a report from Hewitt EnnisKnupp.
Following on from the consultancy’s water-cooler moment paper “Is the Yale Model Dead”, analyst Emory Zink wrote that the difficult question isn’t whether to add alternatives to the portfolio, but how to appropriately and responsibly integrate them.
She has devised four questions CIOs should consider:
1) What quality of alternatives is available?
2) Are all my stakeholders truly committed to this investment?
3) What is an acceptable illiquidity level?
4) How do alternatives relate to other portfolio constituents?
The quality issue is particularly important in an era where there is greater competition for a limited pool of assets, Zink wrote.
When endowments such as Yale and Harvard began investing in alternatives, they were able to pick the cream of the crop uncontested. Today, there’s far more investors vying for the best returning assets.
“Furthermore, endowments whose schools produce large numbers of successful alumni working within the investments field may gain access to an alumnus or alumnae’s closed fund and may negotiate preferential terms in honor of the relationship,” Zink wrote.
“Not all investors have access to the same universe of alternatives, and it naturally follows that not all portfolios should make alternatives allocations based upon the history of models with significantly different investable universes.”
Other top tips included that patience was a virtue and that investment committees that tend to second-guess investment performance rather than riding out small blips were unlikely to be successful in investing in alternatives.
Zink also highlighted that given the high illiquidity associated with alternatives, modelling was more difficult than with traditional asset classes.
The Hewitt EnnisKnupp findings arrive at a noteworthy time for the alternatives market, as sovereign wealth funds are reportedly seeking greater exposure to it.
“Before incorporating alternatives into a portfolio, the investment staff should be certain that liquidity tightening won’t affect the short-term ability of the portfolio to meet its payout mandate,” she wrote.
To read the full report, click here.
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