Convincing financial advisers to place assets in alternative investments used to be a major challenge. My belief that advisers were capable of making rational decisions and possessed above-average financial acumen was a youthful mistake.
My experience has taught me when marketing alternative assets to advisers, you want to focus on the select few who have the capability to comprehend what it is you are offering them. To my trusted advisers who continue to utilize common sense and remain opportunistic, I salute you.
There are billions of assets in the marketplace waiting to be placed together. Those assets will continue to move to the alternative investment arena as educated clients begin to realize the disservice their traditional advisers have done to their wealth.
The average retail investor has little chance to accumulate a decent rate of return. Today, automated market makers cater to the masters of expensive technology by participants whose only concern is to squeeze out a cent or two before they move on to other countries' markets.
Advisers who place their client assets in these shark invested waters will continue to sacrifice the hard earned money of their trusting clients. I used to believe that these advisers were simply being outwitted by the institutional players; however, it actually comes down to ignorance and the unwillingness to change.
Efficient versus inefficient asset classes
When we agree to speak only about facts, it is impossible to "beat" the proverbial "market." Most everyone agrees that the public stock and bond markets incorporate most publicly available information regarding a publicly traded corporation, both past information and present. Most of the time, this information is reflected in the price of that company's traded securities.
That being said, inefficiencies exist in these liquid markets; if not, there would be no reason for actively managing beta from the almighty fund manager. Unfortunately for investors, whatever efficiencies do exist, they are small and fleeting. Information is easy to acquire and disseminate in the publicly traded markets. That is why even the best fund managers are only providing excess returns of 1 percent over their respective benchmark.
There is reason to be optimistic, though most reading this piece will continue to construct their asset allocation based on the tenants of modern portfolio theory — I hear that same line 1,000 times per year.
Those of us working in the alternative space understand that the inefficiency and illiquidity that exists protects client assets from the parasitic nature of the program trading program. While in the traditional market, top quartile active managers earn access returns of 1 percent per year, the difference between top quartile and bottom quartile performance in private equity can be as much as 25 percent.
It is very simple. The difference in talent between mutual fund managers is very small — little opportunity — compared to the alternative space where the best managers outshine their peers by leaps and bounds.
The little opportunity available in the traditional stock and bond markets makes advisers feel secure in their decisions to invest with one respective manager over another. The advisers with courage, confidence and faith in their abilities as a professional will play in the alternative market all day.
The average investor is waking up to these truths. It is not too late for all of you traditionalists out there. Come join us.