Strategic Alignment, Education Will Drive HNW Investor Growth
The influx of high-net-worth and mass affluent investors is significantly changing the dynamic of the global alternatives market, introducing an important new source of capital for fund managers but creating new challenges regarding education, distribution, product suitability and costs.
In a panel discussion, “The Future of Global Alts: Democratization, Diversification & Beyond,” at our recent Global Alternatives Summit in Miami, CEO John Sergides discussed how the market is being reshaped with Bill Ferri, Global Head of Asset Management at Cantor Fitzgerald, and Aimee Hirata, Global Head of Product Strategy at BlackRock Alternative Advisors.
Once primarily investment vehicles for institutional investors, global alternatives—ranging from hedge funds to private equity, and infrastructure to private capital and real estate—are seeing that finite universe expand with fund managers and investor benefitting.
“It’s been proven over and over that high-quality alternatives have a better, long-term impact on the total portfolio context,” Aimee said.
And since the global financial crisis, “high-net-worth money has shown itself to be a ‘stickier’ investor in alternative asset classes than institutional money,” Bill said.
Fund managers can seize opportunity by tailoring offerings to diversified high-net-worth investors when raising capital, citing a hedge fund that used its bargaining power to negotiate costs, fees and terms that would “help them make money for clients, which was locked up capital, so they didn’t have to be sellers when they didn’t want to be,” Bill said. “That worked exceptionally well.”
Fund managers also must improve strategic alignment with products, education and distribution to better equip high-net-worth clients and their advisors in the investment process.
“The [product] structure has to fit the strategy,” Aimee said. “If you can be disciplined with respect to what you’re willing to create, recognizing there’s this huge pool of capital to go after, I think you can be successful for your end investors, which is what we’re all trying to do.”
John acknowledged that “the education process is a real struggle” in attracting high-worth-individuals who want to invest directly in alternatives.
Aimee agreed, saying increased education will better equip individual investors to make decisions. “From an investment manager’s perspective, I think the most successful approach is to find those organizations that have that centralized, almost CIO, element with respect to allocation,” she said.
The challenge for advisors is ensuring “clients understand what they need for liquidity,” Bill said. “You have to have a consistent allocation to these things, not pick ‘what’s hot’ and then go on to the next one.”
All agreed that costs, as well as performance and management fees, are likely to come under greater scrutiny from retail investors. “The question is, what am I getting on a net basis,” Aimee said. “I think you should be willing to pay higher fees if you’re getting that end net result. Are you, as the investment manager, aligned from a fee perspective with what you’re performing for clients. That’s where the performance fees come into play.”
Fee pressure discussions often focus on reducing fees rather than improving performance, John said. “The cheapest is never the best, the same as the most expensive is not the best,” he said. “There has to be a fine medium in the middle, where costs build in not only what I do today, but what I’m going to do in the future.”