If top managers have trouble recognizing the difference between alternative assets and alternative strategies, what hope do the rest of us have?
“I was at a conference recently and asked a keynote speaker about the future of alternative strategies,” Curian Capital’s Gabriel Burstein, Ph. D. (left), told ThinkAdvisor during a discussion with colleagues on Thursday. “He answered by describing assets like commodities and real estate, and not a word about strategies, so even legendary managers get confused, and that confusion is spreading.”
It’s an ongoing and widely observed problem. Although Dorothy Weaver, CEO of Collins Capital, recently said advisors are on “the cusp of really understanding the difference between alternative strategies and assets,” they’re not quite there, and it remains a frustration for all involved.
“An advisor in Texas with whom I was recently speaking said whenever he talks to his clients about alternative strategies, they don’t want to hear it because they might have lost so much recently on commodities or real estate,” added Burstein, head of investment strategy in asset management at the Denver-based firm. “They don’t realize that the assets might have a volatility of 20%, say, annualized over a 10-year period, but the strategies might have 5% to 8% volatility.”
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Disentangling strategies from assets with advisors and clients is the challenge the industry faces, he said.
Jim Gilmore, a VP and portfolio manager at Curian, noted the number of people with institutional experience at the firm that are “getting used to common terms on the retail side,” but are seeing abuse in how they’re used and implemented.
“Institutional plan sponsors use no more than 10% in their portfolios to combat inflation, and in periods of low inflation those allocations may be dead weight,” Gilmore (left) said. “Look at gold; everyone on the retail side has been told it’s where they have to be. Well, if they started the year with $1 they ended with $0.75. We’re trying to recognize the risk/return characteristics of each strategy and weight them appropriately.”
He added that the retail side is looking for one strategy that is a “panacea” for managing volatility, and it’s usually something that “isn’t a very substantive return driver.