Headlines about the relative success or failure of alternative assets like hedge funds can affect clients’ — and advisors’ — attitudes about those strategies.
Advisors need to educate their clients on what alternatives can do and what they should reasonably expect, according to Jeremy Frank, managing director and head of quantitative research at 361 Capital, a firm that provides liquid alternative mutual funds to advisors and their clients. (Disclosure: 361 Capital’s chief investment officer, Cliff Stanton, writes for Investment Advisor magazine.)
Alternative assets increased $648 billion in 2014 to almost $7 trillion, according to Preqin’s “Investor Outlook: Alternative Assets H1 2015.” However, different alternative asset classes fared better than others. For example, hedge funds, where 48% of alternatives investors have more than 10% of their AUM invested, struggled in 2014, when they had their worst year since 2011 and 22% of investors said they lost confidence in the funds.
By comparison, investment activity in private real estate remained stable, and investor confidence actually increased; a third of investors said their real estate investments exceeded expectations, and almost 80% said they plan to increase their investment in 2015.
Frank said in an interview Monday that 361 Capital takes a consultative approach to education, “working with our advisors and really helping them understand what it is we do, what it is our strategies are trying to take advantage of, [and that for our flagship strategy,] a comparison to the S&P 500 index return really has no meaning.”
That way, when advisors’ clients “say inevitably, ‘Well, the S&P was up 30% last year and this fund was only up 5% or 10%. Why is it underperforming so much?’” the advisors can explain that “our strategy in particular has no correlation, or sometimes negative correlation, to equity markets.”
Frank said that’s a “general theme across the industry — many shops, not just us are working to educate advisors, kind of move them away from the headlines [to] focus on understanding the strategy and what drives the strategy’s returns.”