Finally, Hindsight Is 2020

Simultaneously, fee compression and the rise of passively managed products have propelled the projected revenue for alternative investment products to nearly half of total industry revenues, despite representing less than 20% of AUM. We expect investor desires to increase allocations to alternatives to match those of asset managers who see the potential for higher revenue, but our industry must make sure interests are aligned and investors understand the products they wish to own.

Source: CAIA Association

Due Diligence: How the Investment Process is Changing

In a similar vein, we cannot underscore the importance of manager research and due diligence, especially for those investors new to this space. Anyone who allocates to external managers must understand the important balance of quantitative, qualitative, and operational due diligence in due diligence process. It’s not sufficient to have an impressive track record or a Sharpe ratio in isolation – people, process, and culture are finally being recognized as more important indicators of future success. The saying goes that you can’t “eat risk-adjusted returns,” but I would add that you can certainly eat crow if Madoff 2.0 shows up in your office and you take the bait!

The importance of due diligence only increases in its importance within the world of private capital, where investor interest lies today. Private equity already presents difficulties in the way of quantitative analysis, especially in terms of integration into a total portfolio, but it is cited as one of the most difficult to analyze according to CAIA Members. What is more, private equity also places a high relative importance on qualitative factors to determine future performance.

ESG and Alternative Data

Pandemic aside, the secular trends of ESG integration and use of alternative data have added further complexities to the manager research process. Much has already been written on integrating ESG factors into public markets and liquid strategies, but I’m excited to see what can be done with ESG’s integration into private markets. While private market participants have the benefit of long-term time horizons, they also face implementation challenges. Two of the biggest challenges for GPs and LPs, according to a recent Pitchbook survey, is a lack of robust data on ESG factors for private companies and a struggle to define and measure impact.

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