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Evaluating alternatives in multi-asset class portfolios

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"Evaluating alternatives in multi-asset class portfolios"

With investor demand for alternative investment solutions rising, Fidelity Institutional Wealth Adviser (FIWA) has issued a new report to help advisors as they consider adding alternatives to client portfolios. In particular, there is a focus on the need to conduct a rigorous due diligence process before investing in alternatives. FIWA examines all the facets to consider when creating an alternative investment strategy, including the importance of diversification.

Key takeaways:

  • Advisors and home-office CIOs have been increasingly focusing on alternative investments for client portfolios, with their interest driven by technological enhancements making it easier to invest; the growth of strategies that offer access to alternatives with a degree of liquidity to investors of all types; and significant demand from investors for more creative solutions to help them address increasingly challenging investment problems.
  • In addition, increased data availability on alternative investments is enabling more analysis that may build confidence in their utilization for new allocators; but alternative investments entail many complexities and idiosyncratic risks, resulting in higher dispersion among top- and bottom-performing managers and requiring a rigorous due diligence process.
  • FIWA proprietary research comparing return dispersion between traditional and alternative asset class funds underscores the importance of due diligence when investing in alternative investments, while also highlighting the benefits of diversification.
  • The foundations of a due diligence process for alternative strategies encompass many facets, including analysis of the people managing the strategy, the firm behind them, their overall investment philosophy and process, and the alignment of the portfolio with the stated strategy over time. The terms and fees of the product, performance, and the overall governance of the firm and its funds are also key. But execution of this process is nuanced, requiring unique expertise.

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