Expanding Models, Platforms for Alts’ Retail Investors

With new capital flows in global alternatives of between $500 billion and $1 trillion expected from global mass affluent retail investors in the next three years, fund managers are developing new strategies and reexamining models to attract that capital.

Recognizing and addressing the needs of retail investors in the alternatives marketplace—who are expected to increase holdings from 2% to 5% in the next three years—was a key theme of the panel discussion, “Alternatives Go Mainstream: Raising Capital in the New Paradigm,” hosted by Michele Martin, our Head of North American Sales, with panelists James Costabile, Head of Alternative Investment Distribution at iCapital, and Shannon Murphy, Managing Director at Jefferies, at our recent Global Alternatives Summit in Miami.

“It’s really hard to overstate how much of a transition period we’re in right now,” Shannon said. “Alternatives are increasingly a ‘must need’ part of portfolios, whether it is on the retail front or the institutional front.”

James noted that 85 percent of US households have financial assets of less than $500,000, while about 1.5 percent have financial assets above $5 million. The remaining 13.5 percent of households have financial assets between $500,000 and $5 million, and his firm is seeing increased flows in alternatives—such as registered funds, non-traded Real Estate Investment Trusts and interval funds—focused on that 13.5 percent.

The results of an investment advisor survey conducted by iCapital in April found that 95% of the  400 respondents “either plan to increase or keep their allocation to alternative investments the same in the next 12 months,” James said. “When you looked at those financial advisors that had more than a half a billion dollars of AUM and above, roughly two-thirds of those advisors actually planned on increasing their allocation to alternative investments.”

Education, distribution, liquidity of products, portfolio fees, and cost-effective methods of raising capital continues to dominate discussions within the industry.

Shannon noted that the “best distribution is grounded in education and explaining why the incremental dollar should be allocated to your fund instead of going someplace else.”

Citing the success of platform growth in the last few years, she said some well-known multi-manager “pod” shops experienced “parabolic growth” in generating returns. She added, “money keeps flowing into that space, even now, even where people have termed out capital, they’re locking it up for longer—two, three, in some cases, five years—and the appetite isn’t quite ebbing.”

And the industry is innovating to improve asset allocation, as “the model marketplace has grown pretty dramatically at the financial advisor level, but also asset managers are creating their own models, which are generally risk-based portfolios, conservative to aggressive,” James said. “I think the next innovation is, how do you package these periodic liquidity alternative investments in such a way to make it scalable for that advisor and that firm to allocate to alts—where you have characteristics of hedge funds, private credit, private equity, and real assets as part of that.”

When reviewing portfolio diversification, asset allocation and potential volatility, Shannon said, “it’s really important to get granular on what your specific portfolio needs are going forward, and think about some of the solutions that might exist now, but didn’t exist the last time we all went through these exercises in 2019, 2015 and even prior to that.”