“To give an accurate description of what has never occurred is not merely the proper occupation of the historian, but the inalienable privilege of any man of parts and culture.” -Oscar Wilde
Aligned with George Santayana’s quote from A Historic Blogpost (Part 1), today’s quote by Oscar Wilde is seemingly of the opinion that history can be misleading at best or intentionally false at worst. Perhaps a good approach – which has much broader application beyond that of history – is to employ healthy skepticism, seek multiple viewpoints (especially from those who disagree!), and try to understand a variety of data before forming a steadfast opinion. We’d be wise to keep this in mind as we continue our foray into the world of alternatives and the mission of identifying quality managers/strategies.
Yippee CAIA
Picking up where we left off in Part 1, as we started utilizing more alternative strategies for clients, I also began pursuing alts education from a more academic perspective. In late 2017, I was invited to a 2-day workshop on the “Fundamentals of Alternative Investments” from the CAIA (Chartered Alternative Investment Analyst) Association and sponsored by one of our alts platform partners. As the title implies, it covered the basics across various alts segments, broken down into twenty 1-hour modules. They presented a number of these in person during the workshop, and then we had to complete the remaining ones in the weeks that followed.
I was admittedly on the fence about attending the Fundamentals course, but it got me hooked on the idea of pursuing the full-fledged CAIA designation. It was a far more involved undertaking, consisting of two levels, each with a recommended 200 hours of study. There was a modest discount for having completed the Fundamentals program, and – if I acted quickly, I could complete the entire CAIA program before the end of 2018 (exams are offered in spring and fall).
Plans That Either Come to Naught Or…
To find the time for this endeavor amongst other obligations (like work and a budding family), I began studying when I woke up, commuting to-and-from work, and then before I went to bed. I needed to get through about 300 pages of material per week to leave a few weeks for practice exams, as the exam window was only about two-and-a-half months away.
After passing Level I (March 26, 2018), I originally planned a similar approach for Level II, but the electronic-only study materials I purchased could not be printed out for reading. So I adapted the process by reading on my phone during my bus ride and then listening to the text being read by a very unpleasant robotic voice while I walked across the city each day. And since the robot-voice technology couldn’t delineate between important text and useless text, the experience included listening to every page header, footer, footnote, and page number (very often mid-sentence) between each page transition of the e-book.
I have such a clear memory of hearing that robot-voice nonsense with NYC’s Bryant Park as a visual backdrop – which I’d walk through to/from our office in Midtown each day – and it now just makes me laugh because it was so ridiculous. I constantly struggled to pay attention to the voice (it wasn’t exactly captivating material and had none of the intonation found in everyday speech patterns) and had to rewind many times to ensure I understood the concepts, but I eventually got through it. On November 5, 2018 – about seven weeks after my exam – I received the official notification that I passed CAIA Level II. What a relief. And smart marketing (smarketing?) by both the alts platform and CAIA Association. They got me – hook, line, and sinker.
Alts Jokes Are Like Dad Jokes…Only Worse.
Q: What do you get with you cross a stupid basin with unpredictable volatility?
A: Idiosyncratic (idiot sink erratic) risk
As we added alts to client portfolios – in addition to staggering the investments over a few years and laddering liquidity structures for greater access to cash if absolutely necessary – another consideration was identifying funds with idiosyncratic (i.e., unique) risks vs. one another. If the risks and return drivers of a given strategy were a) significantly different than other funds in the portfolio, and b) not highly dependent upon general stock/bond market movements, then we could (at least in theory) build a more robust portfolio.
If we dive into the premise of each underlying fund in this current edition of alt.Blend, it’s going to get too lengthy. What I’ll do instead is provide a brief overview of the list of strategies, along with structural/liquidity notes, so you can get an initial sense of how these pieces allowed us to build a diversified mix of alts for clients. I’ll then write a “Part 3,” where we’ll go a bit more in-depth on these.
Private Equity
- Private real estate (fund of funds): interval mutual fund with quarterly liquidity (subject to gating).
- Triple-net lease real estate: private REIT with quarterly liquidity (subject to gating).
- Private real estate (focused on distressed municipal structures and alternative energy lending): private equity drawdown structure. Illiquid.
- “Recession resilient” private real estate: private equity structure with all capital taken up-front (i.e., no drawdown). Illiquid.
- Globally-diversified private equity (also includes an allocation to private credit): open-ended hedge fund with quarterly liquidity (subject to gating).
Private Credit
- Real estate credit strategy (focus on construction lending): capital accepted as loans are made. Annual liquidity (subject to gating).
- Private credit (lending to private equity transactions): BDC (business development company) with quarterly liquidity (subject to gating).
- Small business lending: private equity drawdown structure. Illiquid.
- Direct consumer lending: interval mutual fund with quarterly liquidity (subject to gating).
Other
- Reinsurance: interval mutual fund with quarterly liquidity (subject to gating)
- Life settlements: open-ended hedge fund with semi-annual liquidity (subject to gating)
Thinking back to the opening quote of this piece, we also have to be aware that it’s impossible to know what the future holds. As we continue to witness in real-time, heroes of the day often become the abject failures of humankind after being held under the microscope of historical perspective. And sometimes it takes centuries to ultimately draw the line between the right and wrong sides of history. With our portfolio of alts investments in mind, we’ve now had several years to form an opinion regarding which are progressing well and which are not – and on what side of history each may find itself – and I’ll do my best to provide relevant insights in what will now be Part 3 of this topic.
Until next time, this is the end of alt.Blend.
Thanks for reading,
Steve
