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October 01, 2015 at 12:55 PM
What seems like a good idea on paper may not pan out in the real world for the everyday retirement saver.
This split decision seems to be reflective of what many investment professionals are saying (see “Are Plain-Vanilla 401k Investment Options a Fiduciary Imperative?” FiduciaryNews.com, October 10, 2015).
If you listen to no less than an authority as Tamar Frankel Fiduciary Prize winner David Swensen, he’ll tell you that what works for billion-dollar institutional portfolios can’t be easily translated to the retail investor.
Alternative investments (or “Alts”) became popular in part because of portfolio managers like Swensen, who is the chief investment officer at Yale University.
Very large portfolios—like university endowments, which range in the billions of dollars—find it difficult to secure above-average investment returns in the arena of publicly traded companies.
Because they are so large, to rely solely on these securities would create a de facto index fund.
That wouldn’t necessarily impress the university trustees. More importantly, it wouldn’t be prudent management.
When a portfolio manager has portfolios in excess of nine digits, the range of investment opportunities increases dramatically.
In particular, they have enough capital to negotiate customized deals in the private markets.
In other words, they don’t have to buy real estate investment trusts: they could purchase specific real estate properties. These customized deals, in return, can yield—and have yielded—impressive returns.
To be fair, Swensen wasn’t the first to discover this.
Warren Buffet executed these types of private transactions since the very beginning of Berkshire Hathaway.
Once a portfolio manager achieves a certain critical mass in funds, private deals are the norm, not the exception. Hedge funds rose in popularity in part because their managers weren’t limited to buying and selling on the open market.
It wasn’t long, then, that Alts became classified as just another investment class on the big asset allocation pie chart in the sky.
Alts seemed to exhibit non-correlated behavior (which failed famously in the credit crisis of 2008-2009). Indeed, The Economist (“Yale may not have the key,” March 10, 2011), cited the illiquidity of Alts as their Achilles’ Heel.
