Alternative investments are not widely available in defined contribution plans. The Defined Contribution Institutional Investment Association (DCIIA) Retirement Research Center 2022 Custom Target Date Fund study found relatively little use of alternative asset classes, which the study labels as “diversifier allocations.” According to the study, the most commonly used diversifiers include global tactical asset allocations (4%) and bank loans (3%), followed by hedge funds, private equity, and risk parity (all at 2%). Among all plans, only 15% use a diversifier within their custom TDFs and the “vast majority allocate to just one diversifier,” the study found.
But given 2022’s investment results for traditional asset classes, it’s not surprising that advisers are seeking to learn more about alternative assets. An October, 2022 survey of independent financial advisers, asset managers and other industry professionals by alternative investment platform CAIS and Mercer found 88% of advisers plan to increase their allocation to alternatives over the next two years. Fifty-three percent estimate that their allocation to alternatives will make up more than 15% of their overall client portfolios.
“The expectation of lower returns in the coming years, coupled with higher structural interest rates and inflation, has created a voracious appetite for alternative, uncorrelated sources of return,” says John Bowman, executive vice-president of the Amherst, Mass.-based Chartered Alternative Investment Analyst (CAIA) Association.
The Educational Hurdle
Alternative asset managers are responding to that interest. Sixty-three percent of the CAIS/Mercer survey respondents plan to launch new products in the next few years and 46% plan to create new structures, such as interval funds or ‘40 Act liquid alternative funds. Managers’ optimism is tempered by a concern over a lack of education or understanding about their products, though—75% cited that lack of knowledge as an obstacle to alternatives’ adoption.
The report notes that there is an abundance of educational industry content available but cautions that “it’s sometimes hard to discern what’s important to know about each asset class, investment structures and the specific funds they’re considering.” Suggested solutions to the knowledge gap include online learning platforms that are designed to distribute the most relevant information and useful insights.
Several organizations provide alternatives education. New York City-headquartered CAIS provides advisers a wide range of alternative investments for clients and education about alternative asset classes. According to the CAIS website, the platform offers access to multiple strategies, including “hedge funds, private equity, private credit, real estate, digital assets, and structured notes.” Advisers can also create customized funds. Mercer provides independent due diligence and ongoing monitoring of funds listed on CAIS.
On the education side, CAIS offers the CAIS IQ self-paced learning system. According to the company’s website, “CAIS IQ courses are created with curated independent expert content to help advisers master key information about asset classes, product providers, and specific funds and products.” Courses use an adaptive learning system designed to increase each user’s learning speed and improve retention. The organization also hosts the CAIS Alternative Investment Summit.
The CAIA also offers multiple educational programs. Advisers seeking to earn a professional designation can pursue the CAIA Charter, which requires passing two levels of qualifying exams and relevant professional experience. The exam-preparation curriculum covers a range of alternative asset classes and portfolio management. The charter is recognized globally, with over 13,000 charter holders in more than 100 countries, according to Bowman.
In April 2022, the CAIA announced the launch of UniFi by CAIA, a self-paced alternatives-learning platform that is separate from the charter program. Per the organization’s press release: “UniFi by CAIA will allow participants to complete a series of online modules in a number of key alternative investment categories, such as private equity and private credit.” Participants will be able to earn certificates in the fundamentals of alternative investments, private debt and digital assets. Bowman reports that over 10,000 participants have completed the capstone fundamentals course.
Institutional Capital Network (iCapital), an alternatives investment platform based in New York City, regularly updates its site with articles and blog posts featuring news and educational articles. For example, recent posts discussed private market fund fees and structured products. iCapital teamed with CAIA in early 2021 to develop AltsEdge, a ten-part educational program that covers the primary alternative asset classes and portfolio construction.
Other organizations are getting involved with educating advisers’ on alternatives. AltsDb in Fort Worth, Texas produces podcasts, newsletters and hosts online events for both advisers and accredited investors. Andy Hagans, co-founder, describes the company as an independent media platform covering the U.S. alternatives industry and the publisher of The Alternative Investment Podcast.
Hagans says AltsDb was founded in the fourth quarter of 2021 and traffic to the site started spiking in 2022’s first quarter. He cites attendance at the firm’s virtual 2022 Alts Expo in early December as an example of the growing interest in alternatives. “We were expecting 400 to 500 participants,” he says. “We had nearly 600 participants register, so that definitely exceeded expectations.” AltsDb archives its event presentations, podcasts and webinars on its YouTube channel. Alternative investment product issuers provide sponsorship, speakers and educational content, Hagans explains.
In late November of 2022, the Franklin Templeton Academy announced the launch of its Alternatives Education program for financial advisers. The program includes courses on private equity, real estate, private credit, infrastructure and hedge strategies. According to the company’s press release, the program will include “in-person and on-site classes, interactive webinars, self-paced e-learning modules, and pre-recorded video. The program also offers background sheets and workbooks to supplement and bolster the learning experience. Course content is developed and delivered by experts in the alternatives industry.”
DC plans are more likely to access alternatives through a fund in their lineup versus a direct investment option. But as the DCIIA study highlighted, the average current exposure to alternatives is low. So, is it still important for product suppliers and education platforms to educate advisers, participants and sponsors about alternatives if they’re only embedded within funds?
“Sponsors should have a working understanding on what is in their funds, managed accounts, target date products, etc.,” Bowman maintains. “As the main liaison to the client, they are obligated to be able to grasp and effectively communicate the characteristics and risks of each portion of the portfolio.”
Hagans agrees. When things go sideways, as with black swan type of events, that’s when their understanding matters, he says: “If I’m an RIA, especially if I’m a fiduciary, I want to understand what is owned within any underlying fund. And I think with alternatives, they tend to be more complex and there tends to be more of an education gap there.”