How to Run Alt Investments: A Primer | Chief Investment Officer

Alternative investments have become very popular among asset allocators, many of whom are seeking diversification after a rocky 2022 for traditional investments, namely stocks and bonds. Among public pension plans, alts are now more than one-third of assets, often managed through limited partnership funds.

Given the swelling popularity of alts, the Alternative Investment Management Association Ltd., the asset category’s trade group, has come up with a list of how-to tips for alt fund managers, ranging from dealing with valuation problems to ESG challenges. These suggestions are necessary to advance “sound practice excellence for managers,” according to a report from the AIMA’s global investor board, chaired by Eduard van Gelderen, the CIO at Canadian pension manager PSP Investments.

Alts encompass disparate approaches from the likes of hedge funds, private equity, private credit, venture capital and real estate, but common best practices prevail for all, the report found.

For one thing, alt fund managers should consider banding together and sharing costs—which magnify their clout and expand their knowledge, the report recommended. Also, it said, managers should detail “what the fund is actually doing and be upfront about how the fund may be similar or different to competitor funds.”

Never miss a story — sign up for CIO newsletters to stay up-to-date on the latest institutional investment industry news. 

The report urged that funds view their portfolios “holistically,” meaning how they stack up against other investing techniques. So, for instance, investors in private assets should compare their risk, performance and diversification with publicly traded assets.

In light of controversies surrounding environmental, social and governance investing, the study argued that ESG-oriented funds should better explain what they are doing. The implication was that too often they fail on this score because of the “thorny” difficulty “of squaring their fiduciary duty to their underlying investors with a desire to do good.”

The report added that there “is no need to be all things to all investors, but being honest, authentic, and intentional about your approach to ESG” has the best chance of minimizing frictions.

For hedge funds, the study applauded the trend toward lower fees, once 2% for maintenance and 20% for managers’ incentive payments, and the advent of “hurdle rates” to determine incentive payouts.

For private equity, which had a sterling 2022 when other investments flagged, there’s a danger that many now view them as over-valued. To combat this perception, the report declared, PE managers should be “much more transparent” in how they arrive at asset values for their non-public holdings.

Nonetheless, the “denominator effect is real,” the study stated. This is the tendency to value private assets more highly than public ones, whose prices have tanked. PE managers must expect that investors may slow their commitments to the funds “for the next year or so,” leery about over-paying for stakes in PE vehicles.

Meanwhile, the report said, funds launched in 2023 and 2024 will fare better, as suspicions over their values will be muted because they are priced in sync with current public market values.

Endowments, Foundations Increase OCIO Use, but Underutilize Alts

Stagflation Fears Have Pensions, Sovereign Wealth Funds Eyeing Alts

Tags: Alternative Investment Management Association, Alternative Investments, Alts, ESG, Hedge Funds, Private Equity, valuation

Japan’s $1.4 trillion Government Pension Investment Fund has allocated 500 billion yen ($3.7 billion) to track the Morningstar Japan ex-REIT Gender Diversity Tilt Index. The pension giant said it began passive management based on the index in March.

The index aims to pursue objectives that align with environmental, social and governance standards in reference to gender diversity and was constructed using the data and scoring methodology of Equileap, a provider of data and insights on gender equality. The index is designed to emphasize companies in the Japanese market that have strong gender diversity policies rooted in their corporate culture and that provide equal opportunities to employees, regardless of their gender.

GPIF said it made its decision to invest in the index after evaluating environmental, social and governance indices for Japanese equities based on the information submitted through the Index Posting System, a framework used by the pension fund to gather information on various equity and bond indexes.

According to Morningstar, the Japan ex-REIT Gender Diversity Tilt Index is comprised of 928 constituents, covering a range of domestic listed companies within 10 different sectors. The top constituents of the index are Toyota Motor, Sony Group and Mitsubishi UFJ Financial Group, which have weightings of 4.11%, 3.06% and 2.18%, respectively. Individual security weights are capped at 5%. The company said that with industry weights neutralized, the index has a low tracking error and low turnover ratio.

For more stories like this, sign up for the CIO Alert newsletter. 

“Based on our belief that the sustainable growth of investee companies and the whole market is crucial for the stable investment returns from assets under management, GPIF takes gender diversity, as one of the ESG factors, into consideration in its passive investment in domestic and foreign equities,” GPIF President Miyazono Masataka said in a release. “This adjustment of ESG portfolio is conducted as part of our risk management of the entire portfolio.”

Companies within the index are ranked in descending order by their Equileap Gender Equality Score and divided into five equally sized groups. The top group includes companies with the highest scores, while the bottom group includes companies with the lowest scores. The tilt factors are then applied by multiplying the weight of each company in the parent index by the tilt factor to determine its weight in the index.

Equileap assigns a gender equality score to companies based on 19 criteria among four categories with different weightings. Category A is gender balance in leadership and workforce; category B is equal compensation and work-life balance; category C is policies promoting gender equality; and category D is commitment, transparency, and accountability.

Eamples of the 19 criteria include the gender balance of senior management, the gender pay gap and policies around parental leave and sexual harassment. Equileap also investigates a company’s legal record and will place those involved in legal cases regarding gender-based violence and discrimination on what it calls the “Alarm Bell List.” Companies on that list are ineligible to be included in the index for a year.

The index is reconstituted every year in December and rebalanced quarterly in March, June, September and December.