Remember the decade of time from 2010 to the very top of 2020? Ah, those were the days! Back then, strategic allocators at institutional investment vehicles and wealth management firms could throw a dart at the public equities markets and expect healthy year-over-year returns.
But everything has changed – And quite suddenly, too.
We’ve all been there – like the busy professional who works after redeyes without noticing jetlag finally lands in London one fateful morning feeling like a zombie, or the athlete that just can’t kick the ball like they used to – a trick that worked for years stops working and we must discover a different way forward.
Similarly, our investing environment has gone from almost guaranteeing gains in the public markets to a volatile and risk-filled landscape, so it’s time to adapt. One of the primary steps strategic allocators, family offices and wealth management firms are taking in this newly uncertain environment is the adoption of alternative assets as a much larger portion of their investment advice.
To some extent, this trend is happening beyond the institutional and high net worth segment, extending even for mass affluent clients that previously just held equities and bonds.
One firm spearheading the move towards adoption of alternatives is AltsAxis, which recently launched its AXIS platform providing alternative investment manager data and tools, as well as connection resources between investors and managers.
Institutions such as public and corporate pension plans, endowments, foundations, sovereign wealth funds and single-family offices are accessing the new platform, typically with over $200 million in assets and at least $5 million in alternatives.
We recently spent time with Mark Salameh, Founder and CEO of AltsAxis, to learn how to address the challenges that strategic allocators are facing in the current environment, the latest alternatives to pique the interest of investors and how firms should conduct alternatives due diligence going forward.
WSR: What are the main challenges that you’ve heard from strategic allocators working at large institutional investment funds regarding the selection of alternative asset managers in the current market environment?
Salameh: One of the issues AltsAxis wanted to solve for strategic allocators was the high cost of identifying alternative assets that many times yielded low returns. In the last bull market, there was a constant challenge of finding managers that would outperform the major indexes. They existed, but it was difficult to pinpoint them in an efficient and cost-effective manner.
Now we’re in an entirely different market and the challenge is how to stay ahead of market headwinds by finding managers that will help reposition portfolios. This is where data integrity is essential for asset allocators during the search process.
WSR: For years, many strategic allocators at institutional investment entities have noted that data on alternative asset managers is frequently insufficient, incomplete or distorted. How does AltsAxis address this issue?
Salameh: Our mission is to provide a complete, objective and unconflicted picture of an alternative asset management firm. We are standardizing the data for both liquid and illiquid strategies. This is essential so allocators can properly compare and benchmark funds.
We provide easily accessible data on fund performance, fund structure, regulatory data (Forms ADV & 13F) and other quantitative data points on one platform to eliminate the historical challenge and cost of gathering all that information.
The AXIS platform also gives allocators control of analytical tools and communication options – text, voice and video messaging – to initiate and cultivate engagement with managers.
WSR: Are there specific types of alternative assets that were out of favor until this year that strategic allocators are more closely examining? If so, what are they and what are the reasons for the recent interest?
Salameh: There are two overlooked strategies that are now getting more attention: Commodity trading advisors/managed futures and distressed debt.
Strategic allocators generally think six months ahead when planning their investments. Many of them had started researching and investing in distressed debt in early 2022, well ahead of the current market corrections.
WSR: If current market and economic uncertainty continue on a prolonged basis, how should strategic allocators at institutions and wealth management firms rethink their allocation to alternatives beyond this year? How should they modify due diligence practices for alt solutions?
Salameh: I do see the current market conditions staying with us for a prolonged basis with geopolitical headwinds, inflation and higher interest rates likely to stay with us through 2023. That means the days of passive investing, which can happen during bull markets, are long gone.
Strategic allocators must now be more diligent when assessing their portfolios and available alternative investment opportunities. They need to reflect on whether they are getting a true picture of the appropriate funds to position their portfolios for success during these volatile markets. They also need to determine if there is any inherent conflict with fund recommendations they might receive.
Finding emerging managers with uncorrelated, niche strategies and a sound investment process takes work because they are usually not on a traditional wealth management platform. Sourcing and due diligence are time-consuming, but extremely necessary, steps when repositioning portfolios.
Asset allocators should understand the data and communicate with the portfolio manager to obtain a complete picture. They should ask portfolio managers difficult questions in a due diligence questionnaire (DDQ) as well as in a meeting to better understand their investment process.
Janeesa Hollingshead, Executive Editor at Wealth Solutions Report, can be reached at email@example.com