The Chartered Alternative Investment Analyst (CAIA) organization issued a paper outlining the improvements the alternative asset industry should make to make it more accessible to investors. The recommendations included a four-point action plan: commit to education, embrace transparency, advocate for diversification, and democratize but protect.
The organization’s report forecast the typical allocations to alternative investments rising to 24% by 2025, facilitated in part by a growing appetite for portfolio diversification among investors in the wake of today’s market volatility. “We believe the merits of diversification will roar back to life in this new environment,” CAIA said.
The report largely focused on describing an ideal vision of alternative investments, where access to the assets was democratized among a larger population than is available to the industry today. The group emphasized key standards that the industry should live up to for the safe facilitation of a plethora of new participants.
“Issues of transparency, reporting, education, and the alignment of stakeholder interests need serious reconsideration to incentivize appropriate behavior and to protect investors,” CAIA wrote. The agency called for a host of different characteristics to be improved upon that would ease the transition of investors into alternative asset classes.
Alternative funds recently surpassed $10 trillion in assets under management (AUM), and are tackling an issue of compressed future returns stimulated by relatively high asset pricing.
CAIA said it intends to facilitate an active industry-wide conversation around future reforms, and advocated for new changes such as uniform performance presentation standards, improved alignment between GPs and LPs to mitigate “agency” costs, development of environmental, social, and governance (ESG) standards in private capital, and a proportional appropriation of security for all stakeholders to avoid selfish and unethical behavior among market participants.
The organization cited that the industry, specifically private equity firms, will need to mature to succeed in the long-term. Speaking about WeWork’s valuation cut from $47 billion to $10 billion after filing an IPO one month beforehand, CAIA leveraged the company’s story as a case study for how the industry should evolve.
Regarding the company’s history, CAIA said “many have taken it as the signal that former private market darlings will need to show a lot more than a strong brand and rapid growth to succeed in the public markets.”
“While we believe that investors can produce superior returns in private capital, it is far from universal given the wide dispersion of manager performance and the flood of money into the strategies,” the report said.
Part of what would help remedy poor performance and general inefficiencies across the market is an emphasis on education, another characteristic that the organization sees as vital to the industry’s success. “As the world becomes more complex and as digitization and emerging technologies reshape the ways in which capital is invested, industry leaders, regulators, and associations must unite around increasing the sophistication and acumen of the practitioners who are advising clients and allocating capital,” the report said.