Multi-alternatives: opening doors and spreading risk

24 Jun 2014

Managing allocations to alternatives, particularly illiquid or private-market investments, places a considerable and often disproportionate burden on institutional investors’ governance budget. Yet, despite this, the demand for alternatives such as infrastructure, private equity and real assets continues to increase as investors seek to exploit their long-term investment horizon and need for inflation hedging.

Features

Being a relatively small product group, each offering within the range of funds and strategies currently on offer are materially different. Some focus more on listed alternatives vehicles to increase liquidity at the underlying and vehicle level. Others focus on private assets, locking investors’ money up accordingly. Others offer a smoothing system whereby the asset allocation changes over time to manage the drawdowns associated with investing in private assets.

What they share in common, is an efficient way to outsource the governance of such investments to an experienced fund manager, who can build a diversified portfolio of alternatives.

Alternative governance

“We have invested in private equity since the late 90s,” says Jo Ray, group manager, pensions and treasury, Lincolnshire County Council. “The issue we found is that we are lowly resourced, as most local authorities are, so were missing some of the vintage years as we weren’t getting to review allocations to private equity.”

Lincolnshire County Council has since appointed MSIM to run a multi-alternatives mandate on its behalf. “The main driver for this decision came when we were increasing our allocation to alternatives, which went from a 5% allocation to private equity, to a 15% allocation across all alternatives,” Ray explains. “We couldn’t properly resource the due diligence, selection, ongoing monitoring, as well as the necessary cashflow management.

“To get the right investments in a timely manner, it was better to get an expert to do it for us and to look across the whole range of alternatives,” Ray continues.

Cagnati reports the two main drivers of allocations to multi-alternatives come from both the relatively small allocations many institutions make to this space, which would place a disproportionate strain on institutions’ resources if they were to try and make individual allocations across the range of underlying strategies, and also the lack of necessary expertise.

“Investing across alternatives also requires a deep understanding of the different asset classes and their relative value,” Cagnati says.