Everybody Wants Alts

Last week I wrote about The Relentless Ask, which is the name I gave to describe the megatrend of alternative asset managers targeting individual investors through financial intermediaries.

It’s a weekly occurrence at this point that some piece of news hits the tape. Most recently, CityWire reported that Fidelity is rolling out alt model portfolios with Envestnet. We’re going to be talking about this for a long time. It’s just getting started.

Quick plug here, if you want to stay on top of the intersection of wealth and alts, I highly recommend following Michael Sidgmore’s Substack at Alt Goes Mainstream. He’s also the host of a podcast with the same name.

I was looking through JP Morgan’s Guide to Alternatives, and I wanted to share a few things that caught my eye. The supply looking for demand at the wealth management level is perfectly obvious when you look at the charts on the left.

High net worth investors, the bread and butter of the wealth channel, only have 2% of their portfolios on average in alternative investments. Blue oceans as far as the eye can see. The supply is there, I’m very curious to see if demand matches it.

One segment of the population that is allegedly demanding access to private investments is young people. Bloomberg ran a story today with the headline:
Young Investor Demand for Alternative Assets Is Reshaping Wall Street's Playbook. Here’s the upshot.

I’m not here to wag my finger at young investors. And I’m not here to say that everything they’re getting access to will blow up. In fact, I’d encourage these neophytes to explore! The best way to learn is to do. So while I’m not yelling buyer beware, I’ll just say buyer be careful. If I had to show one chart to investors curious about alts, it would be this. This demonstrates how wide the distribution of returns can be for private investments versus public ones, like stocks and bonds.

If you’re with a bad large-cap manager, big deal. You still would have done fine over the last decade. And if you want to move your money to a different manager, no problem!

But if you’re with a bottom-performing venture fund, oh boy. You can’t just pick up your money and leave, and worse, you can’t know that the performance is bad until years in the future.

Now here’s the part that I feel fairly strongly about, but leaving open the door that I’m wrong (profile in bravery, I know). Investors with just a few dollars starting out are not going to get access to the best private investments. Maybe there really will be a democratization, but I doubt it. Alright, that’s my little lecture. Be careful, is all.

One other chart that caught my eye was this one, which compares the valuation across different areas of the private equity market versus the S&P 500. Nope, don’t like that.

Listen, part of the reason you’d give up liquidity is for higher returns. And a big reason you were able to get higher returns historically is that you were getting into companies at a much more reasonable multiple. Then throw on some leverage, and voila. Magic. That world no longer exists.

There’s so much to talk about with private markets. I spent 50 minutes with Phil Huber, and we barely scratched the surface! Hope everybody has a great rest of their day.