Financial Advisor Interest In Alternatives Increasing Globally
Financial advisors to individual investors – Registered Investment Advisors in the United States, Independent Financial Advisors in the U.K. – have been slower to embrace alternative investment products like hedge funds and private equity funds than larger institutional investors. Reasons cited for the disparity range from liquidity issues to simply a lack of knowledge about these products.
The tide is turning, however. iCapital Network, a New York-based fintech company which connects advisors and their high net worth clients to alternative investment products, recently announced an expansion of the firm’s European and Asian operations, with two new hires. The additions will help iCapital to grow to meet increased demand from this segment of the allocator universe.
Lawrence Calcano, Chairman and CEO of iCapital, says that the factors affecting institutional investors are just as applicable for individual investors, which in turn are fuelling the increased interest in alternatives from individuals the world over.
“Advisors and their clients are looking at the low interest rate environment and realising that traditional assets might not provide enough of a return to fund a long-term savings goal. The desire to generate returns and to diversify a portfolio isn’t only the domain of an institutional investor. Alternative investments can provide both of these and that’s why I think we’re seeing increased interest.”
iCapital Network pools money from individual investors – at least, the ones who meet the various regulatory criteria necessary to be permitted to invest in alternative investment products – via a technology platform and then allocates that capital to a hedge, buyout, venture capital or real estate fund as a single LP. The increasingly inter-connected, global nature of the alternative investment industry means that the managers which iCapital represents are also keen to tap into this growing segment of the allocator set.
“We have a lot of U.S.-based GPs which market their products on a global basis to institutional investors. They’re asking for our help in Europe and Asia specifically because there is increased demand in those regions from the individual high net worth investor,” said Calcano.
In terms of the products and strategies popular amongst the advisor community, the trends are mirroring institutional investor demand. Nasdaq subsidiary eVestment recently published data suggesting that hedge funds’ net asset flows were positive in the third quarter of 2020, the first quarter of positive flows since Q1 2018. iCapital is seeing similar increased interest in these products.
“We’re seeing more interest in hedge funds, largely due to increased volatility,” Calcano said. “The past few years that hasn’t been the case but being able to invest in a strategy that helps to diversify is very much of interest to investment advisers and their clients right now.”
The increasing interest in private markets products by the institutional crowd is also mirrored by the RIAs. Calcano says that the long lockups required by private equity and venture capital funds aren’t as much of a deterrent to individual investors as one might think.
“The media coverage of the industry is definitely helping to spur interest [in private markets], but clients want to build diversified portfolios and private equity, venture and real estate helps them to do that. Many are fine with stomaching the private markets lockup to get access to these products,” he said.
There is quite a way to go until the mass adoption of hedge funds and private equity funds is achieved by the advisor community, however. At the end of July, The Financial Times said that, of the 300 advisers featured in the newspaper’s FT 300: Top Registered Investment Advisers list, less than half – 128 – had any client money invested in alternative investment products. That said, the U.S. Securities and Exchange Commission recently approved the relaxing of some of the criteria for an American to be considered an ‘accredited investor’, which will enable more Americans to access alternative investment products. Calcano is unsurprisingly pleased by the development, given that his business will likely be a direct beneficiary of the increased pool of capital available to alternative investments. He does, however, urge restraint for those advisers who might be less fluent.
“Allowing more people to get access to alternative investments is a good thing. A lot of individuals have funding gaps, that’s not just the domain of the big pension plans. But with RIAs and IFAs, we’re not talking about one level. There is a range of experience, expertise and knowledge. There are some who are very fluent and can appropriately help their clients navigate these investment opportunities. There are some who need more education. For those guys, it’s critical that they don’t rush into recommending products to their clients. One bad experience in the asset class for one of their clients could taint it for not only the client but themselves. Implementing changes to client portfolios is best done over a longer period of time. Alternative investments are a long-term opportunity and should be treated as such.”
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