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Chronicles of an Allocator

Chronicles: March 2020

Issue 2, March 2020

Dear Investment Professionals,

First, we hope that you and your families are healthy and safe. These are surreal times where the power of professions and communities will help us collectively overcome this unprecedented set of circumstances. CAIA Association stands with each of you and is committed to continue providing insightful and relevant content that anchors us to our long-term fiduciary principles.

Welcome to the March edition of Chronicles of an Allocator. This monthly newsletter has been carefully curated to provide you with a selection of thought leadership pieces, designed to assist and inform the capital allocation process.

As COVID-19 cases continue to increase, volatility has found its way into people’s personal lives in addition to public markets. As we write this newsletter, global stock markets, proxied by the MSCI ACWI, are down over 28% year-to-date, and many investors appear to be selling just about everything they can to move to cash. For the long-term investor, proper diversification and strong portfolio construction is more important than ever, as portfolios are being tested for the first time in almost 12 years.

Whether it’s purposeful allocations to alternative investment asset classes (such as real assets, private equity, and private credit) or alternative investment strategies (such as hedge funds), investment professionals with diverse economic exposures and risk premia have an opportunity to dampen volatility, mitigate drawdown risk, and improve investment outcomes.

Not every investor has access to these investment opportunities, and as the relationship between private and public markets continues to shift, the theme of democratization continues to be at the forefront of regulators minds. This is especially true for private markets. In the United States, the Securities and Exchange Commission has opted to revisit the definition of an accredited investor, potentially lowering the income barriers to invest in these opaque investment structures and increasing the education requirements. This change could set a precedent for future regulatory changes in other jurisdictions. CAIA has been active in both writing and advocating for adaptation of the rule, but only with appropriate safeguards and protection for the underlying investors.

These pieces are brought to you as a “best of” compilation of what we believe is most relevant to you as allocators of capital. They fall under four themes: democratization of alternative investments, the current state of the industry, artificial intelligence and data science, and environmental, social and governance (ESG) issues.

Thank you,

John L. Bowman, CFA, Senior Managing Director, Twitter, LinkedIn

Keith Black, PhD, CFA, CAIA, FDP, Managing Director Content Strategy, Twitter, LinkedIn

Aaron Filbeck, CFA, CAIA, CIPM, Associate Director, Content Development, Twitter, LinkedIn

Democratization of Alternative Investments

Access to Private Capital Benefits Should Not Require Premier Status

As the relationship between private and public markets continues to shift, the theme of democratization continues to be at the forefront of regulators minds. This is especially true for private markets. In the US, the Securities and Exchange Commission has opted to revisit the definition of an accredited investor, potentially lowering the income barriers to invest in these opaque investment structures and increasing the education requirements. This change could set a precedent for future regulatory changes in other jurisdictions. In this post, John Bowman, CFA, Senior Managing Director for CAIA Association, explains why CAIA Association supports increasing access to these markets along with a strong push for better investor education.

Reframing the Role of Alternatives

In this joint study with InvestmentNews, FS Investments conducted a study to gain deeper insight on advisor and investor goals and their knowledge of alternatives’ benefits, drawbacks and role in constructing diversified portfolios. In these surveys, FS found that advisors believe they lack the knowledge to properly have conversations about alternative investments, despite expecting to increase their allocations to them in the coming years.

What About Beta? - Avoiding Silver Bullets

As the increased access to private markets becomes a likely reality, Aaron Filbeck, CAIA, CFA, CIPM, Associate Director of Content Development at CAIA Association, believe we have an opportunity to learn from the mistakes of the past. Almost a decade ago, democratization came in the form of liquid alternatives, which supposedly allowed retail investors to access hedge fund strategies in a liquid wrapper. However, this access came without proper education and expectations setting. Filbeck argues we should put purpose over product this time around and build the groundwork for proper education.

Diversification Strikes Back!

Markets have been in turmoil over the past few weeks, but diversification is alive and well. In this post, Aaron Filbeck, CAIA, CFA, CIPM and Keith Black, PhD, CAIA, CFA, FDP examine recent performance of alternative investment strategies, which have generated strong relative (and even positive) performance. Additionally, they examine the benefits of having a strong rebalancing process and sticking to it in difficult times.

Current/Future State of the Industry

Bain Capital 2020 Private Equity Report

In their most recent annual private equity report, Bain Capital provides a lookback on private equity markets in 2019, a forward view of private equity in 2020, and commentary on historical performance of public and private markets. There’s a lot of uncover in the report, but the bottom line is this: record inflows into this asset class have pushed valuations upwards and forced GPs to make difficult capital deployment decisions. Moving forward, GPs will have to get more creative with investments in disruption, technology, and ESG in order to generate attractive and differentiated returns.

CAIS20: A New World Order: Global. Digital. Responsible

Robert Cultraro, CAIA, CFA, Mauricio Guzman, CAIA, CFA, Sharmila Kassam, JD, CPA and Ju Hui Lee, CAIA, CFA, FSA, ACIA, CERA, FRM joined moderator John Bowman, CFA, Senior Managing Director at CAIA Association on the second day of the Cayman Alternative Investment Summit 2020 (CAIS20) for a panel discussion on the potential effects our shifting geopolitical climate could have on the alternatives market, manager selection, and investment strategies.

CFA New York: Alternative Views: A Savior for the Retirement Crisis

Bill Kelly, CEO of CAIA Association, recently visited CFA Society New York’s Alternatives Group to discuss the current state of the retirement. Topics of his discussion included the future of alternative investments, the large mismatch between pension plans return assumptions and forecasted asset class returns, and a shift from defined benefit plans to defined contribution plans.

Artificial Intelligence and Data Science

In The Room Where It Happens: An Investigation Of The Potential Of Regulatory Technology

CAIA Association and FDP Institute recently had a conversation with Professor Seoyoung Kim from Santa Clara University to discuss her paper with Sanjiv Das and Bhushan Kothari “Zero-Revelation RegTech: Detecting Risk through Corporate Emails.” The paper analyzes email activity within Enron prior to and after its collapse. Watch the webinar replay here or read a written summary from Keith Black, PhD, CAIA, CFA, FDP, Managing Director of Content Development at CAIA Association, here.

A Walk Through The Forest With Joe Simonian

CAIA Association and FDP Institute sat down with Dr. Joe Simonian to discuss the paper that he wrote with co-authors Wu, Itano, and Narayanan in the first issue of the new Journal of Financial Data Science. This discussion of “A Machine Learning Approach to Risk Factors: A Case Study Using the Fama-French-Carhart Model” discusses some of the drawbacks of regression techniques and how applying non-linear techniques, such as random forests, can mitigate these drawbacks. Watch the webinar replay here or read a written summary from Keith Black, PhD, CAIA, CFA, FDP, Managing Director of Content Development at CAIA Association, here.

Environmental, Social, and Governance

Preqin: Impact Report Women in Alternative Assets

In a follow up to their 2017 study, Preqin finds that more women are working in the alternatives space than two years ago. Globally, the proportion of alternative assets employees that are female has grown since 2017. However, a gender imbalance remains at the Managing Director level and above. This report discusses the importance of gender diversity, and details some of the trends in alternative investment asset classes and industries.

Capital Allocators with Ted Seides: Christie Hamilton

In this spotlight, we would like to highlight Christie Hamilton, who was recently interviewed by Ted Seides on Capital Allocators. Christie is Head of Investments for a $2 billion portfolio at Childen’s Health in Dallas, TX. Ted’s conversation covered many topics, but some most interesting parts of the discussion centered around Christie’s thoughts on allocating capital, investing according to mission, ESG issues, due diligence on investment managers, and identifying opportunities and risks in private markets.

What About Beta? - SH(Elijah)

In this What About Beta post, Bill Kelly, CEO of CAIA Association, passionately urges for better diversity of investment professionals. He also takes a pledge that he will no longer participate in panel discussions unless they are diverse and well represented. In his words, we are often told to “think like an allocator” but we also have to stop “acting like a dinosaur.”

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