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Family Wealth Report
Adding Options for Investors – M360 Advisors on Alternatives
By Tom Burroughes
August 21, 2019
The US firm, which operates in areas such as real estate, shares it thoughts about the world of alternative investments and the market environment.
This publication has produced several features and interviews with practitioners in the field of alternative investments. As part of this series, here is M360 Advisors, a US-based investment management company that manages diversified portfolios of senior debt investments secured by first-priority liens on income-producing commercial real estate. We talk to Evan Gentry, founder and chief executive.
How useful do you consider it to think of “alternative assets” as being at the less liquid end of the spectrum (with venture capital and special situation hedge funds, private equity, etc, at one end, and listed equities at the other)?
Although individual assets that underly certain alternative products, like real estate loans, may be illiquid on their own, managers can create liquidity by pooling into a portfolio as an open ended fund; therefore investors can capture an illiquidity premium in returns while also enjoying the benefits of increased liquidity on the portfolio level. Furthermore, most investors recognise that there is no need to have access to all capital at all times.
Portfolios can benefit from allocating to vehicles that offer these illiquidity premiums and strong risk-reward profiles. Alternative investments have become increasingly appealing precisely because their offerings and structures are different from traditional liquid vehicles like listed equities. This provides investors with in-demand options for diversification and attractive returns uncorrelated with broader markets. Pensions, endowments and single-family offices have had meaningful allocations to illiquid assets specifically because they are attracted to the illiquidity premiums.
In the alternative asset class space that you track, what are the main trends you see (in hedge funds, private equity, VC, real estate, infrastructure, commodities, other)? For example: increased/decreased wealth management interest in certain areas (please give examples); use of specific types of vehicles (listed alternatives, offshore structures), redemption/liquidity requirements, etc?
In real estate, we have seen successful niche products re-engineered into similar strategies but with daily liquidity at lower minimum investment amounts; unfortunately, in so doing, investors often face increased fees and/or diluted returns. However, investors are taking greater interest in the range of products out there, including those with less liquidity. Across alternatives, we are seeing a new generation of investors and advisors who are interested in limited partnership funds that are managed by deeply experienced firms in niche product spaces - like litigation finance, commercial real estate or business development companies - where investors are rewarded with potentially higher returns as well as illiquidity premiums.
We expect this interest in more specialised products with higher potential for excess returns to increase, especially as investors look to offset anticipated lower returns in traditional vehicles.
Lastly, we see investors and managers looking to position portfolios more defensively; there is less of an appetite for risk and an increased focus on finding alternatives that are backed by real assets or in a senior position in the capital stack.
How much has the squeeze on yields for listed equities and other conventional asset classes encouraged a shift to alternatives?
In part because of the squeeze on yields for conventional asset classes, and in part because public equity and real estate markets are late in the cycle, alternatives that have attractive risk reward attributes have become increasingly appealing products, especially as they avoid the volatility of traditional markets. Importantly, institutional investors and wealth managers are by and large letting be [leaving alone] their investments in these traditional asset classes. However, as they look to deploy new cash into the market, we see greater interest in alternatives than anywhere else. Due diligence efforts to identify opportunities for portfolio diversification have increased, and a wide array of niche strategies has passed the scrutiny of institutional investors and their consultants, which has led to unprecedented amounts of capital going into alternative strategies.
There is a sort of wealth management quest for the “Holy Grail” of uncorrelated returns, encouraging interest in ideas such as life settlement funds, liability finance, not to mention traditional areas such as gold and diamonds. What is your take on whether such uncorrelated returns are ever really possible?
Investors have many options for tailoring their portfolios, including products that offer uncorrelated returns. Not all investors are looking for the same thing at the same time. The democratisation of information has allowed more investors of all backgrounds and sizes to pursue a broadening spectrum of specialised alternative investment vehicles, which is important for building tailored portfolios that can meet the varied short-term goals of individual investors.
Adding niche strategies can require a higher bar of knowledge, analysis or insight to find good opportunities, but these strategies tend to offer excess, and uncorrelated, returns, creating more effective diversification and providing downside protection.