Retail investors should be wary of a wave of alternative investment products hitting the market, as many carry high fees, lack diversification and offer poor quality investments, managers have warned. of assets.
Large institutional investors have racked up enviable returns in recent years with investments in alternatives, the catch-all term for investments that are not publicly traded, such as private equity, private credit and real estate.
But the asset class was largely out of reach for individuals because it requires large minimum investments and long lock-up periods.
Today, as the industry seeks new sources of growth, a wave of retail-focused alternative investments are expected to hit the market over the next 12 months. Asset managers have warned that these new products may not be as high quality – or affordable – as what is available to institutions.
“Retail products are lacking. . . We haven’t democratized access to a price that makes sense,” Michelle Seitz, managing director of Russell Investments, told FT’s Future of Asset Management North America conference in New York last week.
Retail investors may also be less clear about the additional risks they are taking in terms of volatility and inability to access their cash, she said. “The advantage of a large institution is that you have a CIO who knows very well what their responsibility is. We haven’t provided all of these tools . . . down to the final individual,” she said. declared.
Retail investors are key to the growth of the sector as many institutional clients are already heavily invested in alternative products and some are looking to reduce their exposure. Many institutions already hold around 30-50% of their portfolios in alts, partly due to years of high yields and partly due to recent declines in public market valuations.
The average retail investor has just 2% of their portfolio in alternatives, according to a McKinsey study that predicts that figure could rise to 5% over the next three years. The consultancy’s estimates could bring $500 billion and $1.3 billion in new capital to alternatives.
Retail investors will enter the market at a time when the recent bear market in stocks and government bonds is likely to depress the value of at least some alternative investments.
This means that diversification will be important to provide reliable returns. But retail investors are not offered the same options as endowments and pension funds that have billions of dollars to invest. Many will end up choosing individual funds across trading platforms or investing with sole providers due to the high fees in the industry.
“Most institutional investors will have a portfolio of 20-40 managers in a diversified portfolio. Retail investors can just invest in one manager, which means taking on a lot of risk,” said George Walker, chief executive of $460 billion US asset manager Neuberger Berman.
High concentration risk means some investors could gain, while others will suffer outsized losses, he said. “If you took an institution and saw that their private equity allocation was in one fund, you would be shocked.”
“The growth we’ve seen in democratizing private markets has happened over the past decade, which was a benign market,” said Rohit Vohra, head of global wealth alternatives for Principal Financial Group. “There is a moment of truth coming in the next few months. We’ll see if they really understood what they bought.
Done right, alternative products will give retail investors more options, asset managers said, at a time when more companies are choosing to stay private longer. They can also offer more stable long-term returns, as volatile markets make the traditional 60/40 mix of stocks and fixed income insufficient for investors hoping to retire.
“We are seeing progress, you are seeing an increasing number of[retail alternatives]. . . but they’re still not as liquid, available and inexpensive as they should be,” said David Hunt, chief executive of PGIM.
There is optimism that as alternatives become more mainstream, product quality will improve. “What has changed is the caliber of managers who have entered this space,” said David Levi, managing partner of Brookfield Oaktree Wealth Solutions.
Still, “you can see companies that haven’t built private equity portfolios in a long time, building compelling mousetraps to attract retail investors,” Walker said. “Most [these] the programs resemble the institutional programs and are not just crumbs, the better.
