Trend following and the diversification potential of positive skew

April 26, 2023 | Andrew Snyder | CAIS

Investors tend to rely upon well-known risk-adjusted return measures—such as Sharpe and Sortino ratios—when using alternative strategies to build diversified portfolios and extract differentiated returns. But are investors sometimes forgetting about other important properties that may create a well-diversified portfolio?

What you’ll learn:

Trend following is one of the largest and most established hedge fund strategies, which aims to diversify against negatively skewed portfolios.

• With negative correlation to global equities and a shallower max drawdown, trend following may serve as a diversifying complement to a traditional equity allocation.

• In tempering volatility and drawdown, investors would have historically enjoyed a smoother ride with an allocation to trend-following funds.

• In this piece, we will investigate the potential benefits of incorporating investments with characteristics of positive skew into a portfolio, specifically, trend-following strategies.

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CAIS Modernizes Brand to Reflect Role in Transforming the World of Alternative Investing

March 28, 2023 | CAIS

CAIS, the leading alternative investment platform, today announced a modernized brand refresh to reflect CAIS’ leadership role in transforming the world of alternative investing as we enter a “New Era of Access.”

With financial advisors and alternative asset managers engaging at unprecedented levels, this “New Era of Access” is being driven by a confluence of tailwinds. Led by financial advisors who seek the performance benefits of a modern, three-dimensional portfolio1, additional tailwinds include asset managers who recognize the growth opportunity within the wealth channel2, regulatory changes to the definition of accredited investor3, and technology advancements that pave the way for efficiency.4

“We’ve reached a major inflection point, and the industry expects trillions to be reallocated to alternative investments over the next decade5,” said Matt Brown, Founder and CEO, CAIS. “We are proud to have set the standard for this ‘New Era of Access.’”

A recent CAIS-Mercer survey6 found that nearly 88% of financial advisors intend to increase their allocations to alternatives over the next two years, signaling a rising demand for alternative asset classes amid a backdrop of one of the lowest annual performances of the 60/40 portfolio over the last two decades.7 That same study also found that 89% of alternative asset managers and other financial professionals surveyed have identified the private wealth channel as a greater priority for their firm compared to two years ago.

“The CAIS brand is built on core values that were uncovered during empirical brand research,” said Abby Salameh, CMO and Managing Director of CAIS IQ. “What our clients and stakeholders revealed was that CAIS is trusted, inventive, connected, transformative, and vital. We are excited to share our modernized brand as a reflection of our role and commitment to transforming the world of alternative investing.”

As a result of this seismic shift, CAIS has continued to pave the way with its innovative technology and world-class personalized service. To reflect this paradigm, CAIS’ newly unveiled brand refresh, which includes the launch of a new public website, displays CAIS’ role in transforming the world of alternative investing for each stakeholder in the independent wealth ecosystem including the advisor, the home office, and the alternative asset manager. The visual elements of the new brand represent the movement of this trend. The CAIS Wave symbolizes transformation, connectivity, ease of use, and transparent flow of information among these core constituents, while the CAIS Dot pattern reflects the Company’s sophisticated technology, which ensures a seamless platform experience for all members of the CAIS ecosystem.

About CAIS

CAIS is the leading alternative investment platform for independent financial advisors who seek improved access to, and education about, alternative investment funds and products. CAIS provides financial advisors with a broad selection of alternative investment strategies, including hedge funds, private equity, private debt, real estate, digital assets, and structured notes, allowing them to capitalize on opportunities and/or withstand ever-changing markets. CAIS also offers custom solutions for advisors seeking to create custom fund vehicles around ideas they source.

As an extension of the platform, CAIS also delivers an on-demand, online learning experience, CAIS IQ, which is designed exclusively to help financial advisors deepen their knowledge and increase their confidence in alternative investment strategies.

Most funds listed on the CAIS Marketplace undergo Mercer’s independent due diligence and ongoing monitoring. Mercer diligence reports and fund ratings are available to advisors on the CAIS password-protected platform. CAIS streamlines the end-to-end transaction process through digital subscriptions and integrated reporting with the leading US custodians and reporting providers, which make investing in alternatives simpler.

Founded in 2009, CAIS, a fintech leader, is empowering over 8,300 unique advisor firms/teams who oversee more than $3 trillion in network assets. Since its inception, CAIS has facilitated over $21 billion in transaction volume as the first truly open marketplace where financial advisors and asset managers engage and transact directly on a massive scale. CAIS has offices in New York, Los Angeles, Austin, San Francisco and London. For more information about CAIS, please visit www.caisgroup.com.

Securities offered through CAIS Capital LLC, member FINRA, SIPC.

1 https://www.caisgroup.com/press/retail-access-to-alternative-investments-top-of-mind-for-financial-advisors
2 https://www.caisgroup.com/press/nearly-9-in-10-financial-advisors-plan-to-increase-alternatives-allocations
3 https://www.sec.gov/news/press-release/2020-191
4 https://www.forbes.com/sites/benjaminlaker/2022/05/23/the-platforms-leading-the-alternative-investments-tech-evolution/?sh=21a8b4254f40
5 https://www.mckinsey.com/industries/financial-services/our-insights/us-wealth-management-a-growth-agenda-for-the-coming-decade
6 https://info.caisgroup.com/state-of-alternative-investments-in-wealth-management?utm_campaign=cais-mercer-survey&utm_source=linkedin&utm_medium=social
7 HFR, Venn as of April 2022, 60/40, Portfolio represented by S&P 500 Index and the Bloomberg Barclays Aggregate Bond Gross Index

Contacts

Prosek Partners
pro-CAISPR@prosek.com

CAIS: Evolving Drivers Of Private Equity Value Creation

March 7, 2023 | Andrew Snyder | CAIS

Once considered by some to be “corporate raiders” who used junk-bond financing to take over companies, slashing spending and cutting workforce in an attempt to generate outsized returns, private equity has evolved.

As our analysis here aims to unpack, how private equity managers have driven value for their investors has changed over time as the industry has matured and managers have attempted to differentiate in an increasingly competitive environment.

As private equity has developed as an asset class through multiple market cycles, a variety of value creation strategies has emerged, going in and out of style and effectiveness. These strategies may focus on a portfolio company’s operations, capital structure, or governance—the combination of which may impact the company’s revenue, margins, cashflow, and ultimately, its valuation. Over time, as the private equity industry grew, certain strategies have become more commoditized; in other words, tactics that were once differentiators for an asset manager may have since lost their competitiveness.

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Financial Advisors Want Alts for Everyone, According to a New CAIS Survey

June 21, 2022 | Holly Deaton | RIAIntel

A new survey suggests that financial advisors want all retail investors to have the same access as accredited investors.

A majority of financial professionals, including RIAs, believe that all retail investors should have access to alternatives. Financial advisors already widely recommend that clients who meet the accredited investor requirements allocate to alternatives, according to a new CAIS survey shared with RIA Intel.

The survey of 303 respondents, 107 of whom identify as financial advisors, was conducted by Prosek Partners at the May 2022 Morningstar Investment Conference. The survey was conducted on behalf of CAIS, an alternative investment platform used by more than 5,300 advisory firms with more than $2.5 trillion in assets.

More than 83 percent of financial advisors surveyed say that all retail investors should have access to alternative investments — and 82 percent say that they’re recommending alts to accredited investors. One reason for this may be that 42 percent of those surveyed say the traditional 60/40 portfolio is not as effective as it once was, and 33.6 percent said that it’s not at all effective. 

“When you look at the 60/40 portfolio right now, it’s not doing well. The question is where to find income distribution,’” says Abby Salameh, CMO and managing director of CAIS IQ. “Alternatives are the front-runner as a solution to that challenge.”

Investment in alternative assets has boomed in the past year, even as 2022 saw increased market volatility in traditional asset classes. Global alternative assets under management are expected to increase by 60 percent and reach $17 trillion between the end of 2020 and the end of 2025, far outpacing global GDP and inflation rates, according to alternatives data and research firm Preqin. Dave Lowery, head of research insights at Preqin, told RIA Intel that the more recent volatile macro conditions could accelerate the move toward alternatives, with any drop in value a potential buying opportunity.

CAIS’s own data showed significant growth during the first half of 2022, with the majority of flows across alternative asset classes on the platform seeing double- to triple-digit percent increases; private equity allocation was up 500 percent year-over-year on CAIS, and registered funds were up 400 percent year-over-year. Hedge fund allocations and private credit were up 30 percent and 40 percent, respectively, and real estate was up 80 percent year-over-year.The CAIS platform did see a decrease in digital assets, by 72 percent year-over-year, but all other asset classes and total asset flows increased year-over-year. The number of companies using CAIS has also doubled during the past 12 months to more than 5,300 advisory firms, the company told RIA Intel in May. 

The first half of 2022 saw the launch of several alts-focused platforms such as Gridline, an alts platform targeting smaller funds, and AltExchange, a Plaid-like service that aggregates and organizes information from more than 50 alternative investment platforms for wealth managers.

However, high barriers to entry still exist for investors and advisors who want to diversify with alternatives. They’re expensive, complex, and illiquid, and many advisors don’t even consider them. 

According to the CAIS survey, about 70 percent of respondents cite a lack of education about alternatives as a hurdle to investing in them, while 37.6 percent say high levels of administration and paperwork are barriers to using alts. In addition, 34 percent of advisors cite concerns around due diligence and compliance processes as difficulties when making allocations.

Salameh said that education for both advisors and investors is the key to breaking down some of the barriers that advisors encounter along the alts road. To that end,  the Chartered Alternative Investment Analyst (CAIA) Association recently launched its own education platform to help educate financial advisors who want to learn more about alternatives, following a significant uptick of designation holders. CAIS itself launched a learning tool in 2019.

CAIS: Expanding the (Alternative) Universe

June 10, 2022 | Nicholas Reade | CAIS

We started the year with record highs in global equity markets and a general expectation that the U.S. Federal Reserve (the Fed) would hike interest rates to tame the multi-decade high rate of inflation. At the time, we believed that these conditions – along with rising correlations between stocks and bonds and low expected returns – warranted a reassessment of the appropriateness of the 60/40 stock/bond portfolio (60/40 portfolio). We also presented the case for the inclusion of alternative investments to seek to enhance return, diversify risk and supplement income.

Given the historically poor start to the year that stocks, bonds and the 60/40 portfolio have had – which we previously addressed – we believe it may be time for investors to expand their investment universe and learn more about alternative investments. This includes private equity and debt, hedge funds, real estate, digital assets and numerous other strategies.

As a reminder, it can be helpful to look at the past to get a sense of what to expect in the future, however, it’s also important to remember that past performance is not always a guarantee or indicator of future returns. To this end, the below chart shows the annualized risk and return for traditional investments like stocks and bonds, as well as the 60/40 portfolio.

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The Potential Opportunity in Market Volatility

April 6, 2022 | Nic Millikan | CAIS

For the past decade, we’ve experienced an environment that many consider to be of low inflation and easy monetary policy, while the domestic stock markets recorded the longest bull market in history.¹ 

Then came 2020 and the pandemic induced sell-off in global risk assets and the subsequent fiscal and monetary policy response to shore up economies and stock markets across the world. This stimulus has fed through not only to asset prices, but to the prices of the goods and services we consume. So strong has the impact of the additional liquidity been that we are now experiencing inflation at levels not witnessed in over 40 years.²

It’s been quite a ride for investors who may have benefited from the rebound in the stock market, but so strong have been the gains, that many have questioned whether markets can, and should, continue to move higher. This has manifested itself in the consciousness of investors, 46%³ of whom are feeling “bearish” about the markets.

It is in times like these that some financial advisors turn to the old adage of “stay the course” in an attempt to claim the nerves of jittery clients. 

A potential problem is that we may be entering an interest rate tightening cycle, at the same time we have seemingly high inflation and stock market valuations. In such conditions, it is reasonable to expect that the next decade will look entirely different to the one we have just experienced. So, while “stay the course” may still be wise advice, the present situation may provide an opportunity to reassess client portfolios and prepare them for the road ahead.

The Strategies of the Last 40 Years May Not Work for the Next 40 Years

It has been more than 40 years since we saw both inflation and interest rates peak before starting their four-decade march lower. Since September 1981, when the U.S. 10-Year Treasury Bond interest rate peaked at 15.8, Bloomberg shows the Dow Jones Industrial Average has gained over 38 times despite a few (rather major) hiccups. The prior forty years starting in 1941 saw it gain almost 6 times – more than 6 times less than the most recent period. And just last November, the NASDAQ closed above 16,000 for the first time ever. 

All that is to say that the past forty years have generally been positive for equity investors. But there may be a change in the air.

Traditional Wisdom

Traditional wisdom becomes traditional wisdom for a reason – it generally works. And “stay the course” has generally been positive for investors over the past few decades. But the next 40 years may have a few new factors that may impact markets – the ongoing global pandemic, inflation, Russian aggression, worsening relations with China – just to name a few. 

Tools for the Times

With such a wide range of factors affecting the day-to-day of markets, investors may need to adopt a more active approach to their portfolios to help navigate uncertainty. 

Thankfully, investors today have several tools available to them due in part to their flexibility and relevance to the present market environment. 

Strategic Asset Allocation 

For at least a decade now, the FAANGM stocks (Alphabet, Apple, Meta, Microsoft and Netflix) have become a large driver of broader market performance⁴ given their weight within market capitalization indices such as the S&P 500 now exceeds 20%. However, despite the dominant growth of these, and other high growth stocks, the recent increases in interest rates have many investors reassessing how much they are willing to pay for these names, all of which are currently trading below their record prices set last year according to Bloomberg data.

The traditional wisdom of “stay the course” may see investors stick with these public equity companies in order to participate in potential future gains. However, given where many believe we are in the business and interest rate cycle, it may be more prudent to for investors to update their strategic asset allocation, and to cast a wider net for investments that are lowly correlated to stocks and driven by diversified sources of returns.

Alternative investment solutions such as private market asset classes like private equity and debt, as well as digital assets like Bitcoin may help realign portfolios. 

Tactical Asset Allocation

As markets oscillate and adapt to the changing nature of the broader economy, investors have the opportunity to take advantage of dislocations and divergences to look to hedging instruments, such as hedge funds and structured notes, to seek to trade in and around these different environments. Timing the market is difficult but using these periods could potentially provide entry points into these strategies. 

Take The Opportunity To Reassess Your Portfolio

The core of this discussion embraces the notion of diversification, which, as Nobel Prize winner Harry Markowitz is attributed to as having said “is the only free lunch in finance.”

Investors should take this time to reexamine their portfolios and to figure out how much of them are built on traditional wisdom and how much of them are built for the present and future. 

Here are a few questions investors should ask themselves in relation to their investments:

• How much am I counting on tech to continue doing the same things it’s been doing for the last 20 years?

• How can I hedge myself against the record inflation we’re experiencing right now?

• How much of my portfolio is built on the movements of the last 40 years, and what changes might I want to make to prepare for the next 40?

• With the pandemic winding down, how can I position my portfolio to capitalize on a future world that may look very different from the past?

• What role do alternative investments and sources of risk and return play within my portfolio?

“Stay the course” may remain sage advice, but sometimes a change is so drastic you should stop, look at the course you’re on and consider adjustments to account for new terrain.

For more information about investment opportunities available on the CAIS Platform, contact a CAIS representative.

1. Forbes, “Bear Market And Bull Market: What’s The Difference”, Feb 24, 2022, https://www.forbes.com/advisor/investing/bear-market-vs-bull-market/#:~:text=The%20average%20bull%20market%20lasts,growth%20of%20more%20than%20400%25

2. Bloomberg, “U.S. Inflation Hit Fresh 40-Year High of 7.9% Before Oil Spike”, March 10, 2022, https://www.bloomberg.com/news/articles/2022-03-10/u-s-inflation-hits-fresh-40-year-high-of-7-9-before-oil-spike?sref=gujXdcJY

3. AAII Investor Sentiment Survey, https://www.aaii.com/sentimentsurvey

4. Yardeni Research, Inc., “Stock Market Briefing: FAANGMs”, https://www.yardeni.com/pub/faangms.pdf

Seeking to Diversify Systematic Risk with Global Macro

March 21, 2022 | Nic Millikan & Nicholas Reade | CAIS

Last week, the U.S. Federal Reserve (Fed) took the broadly expected step of raising interest rates for the first time since 2018 to attempt to rein in rampant inflation. The 25-basis point (bps) hike, while small, is significant as it marks a potential shift to a tightening regime that may set us on the path towards a more normalized approach to monetary policy. At the same time, we have seen a resurgence of COVID-19 cases in Asia that threatens to disrupt already fragile supply chains, Russia’s continued incursion of the Ukraine continues to threaten and destabilize both the geopolitical and global economic landscape. Taken together, these events have impacted markets from a macro perspective, potentially ushering a forward return environment that may be driven more by macroeconomic factors than it has been in recent history. Against such an economic backdrop, global macro hedge funds may provide a diversification benefit to offset volatility and the lasting impacts of global uncertainty.

Revisiting Global Macro

Before we dive into the potential diversification benefits of global macro hedge funds, it is worth revisiting what they are. A global macro hedge fund is generally defined as a strategy that seeks to take directionally long or short exposures to different macroeconomic and geopolitical factors, including but not limited to, interest and foreign exchange rates, political events and international relations, essentially focusing on the systematic risk of markets.[1] They can employ discretionary or systematic styles, and may utilize fundamental or technical inputs to alpha generation from the exposure to different risk premia, or betas.[2] Given global macro’s historical ability to deliver positive absolute returns in prior crises, such as the credit crisis, tech bubble burst and pandemic sell-off[3], many investors seek exposure to global macro as a way to diversify equity market risks.[4] Given the confluence of macroeconomic and geopolitical risks impacting equity markets, we are again seeing renewed interest in macro hedge funds by advisors.

Seeking to Diversify Equity Market Risk with Global Macro

Effective diversifiers are investments that when added to a portfolio, either increase the expected return per unit of risk, or reduce a portfolio’s overall risk, leaving expected return unchanged.[5] The historical performance of global macro hedge funds highlights how this strategy can potentially do both. 

First, looking at historical correlations of global macro hedge funds relative to the 60/40 stock/bond portfolio over the last 30 years, we can see that in periods of crises, correlations have declined and moved toward zero. This divergence in performance indicates the diversification benefit of global macro strategies. In some instances, correlation has not only declined, but it has turned negative, allowing global macro hedge funds to potentially add to a portfolio’s overall return while value of the 60/40 stock/bond portfolios would decline.

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CAIS Expands Independent Broker Dealer Relationships with Alts Education

September 28, 2021 | Business Wire

CAIS Expands Independent Broker Dealer Relationships with Alts Education

CAIS IQ empowers financial advisors and home offices with personalized alternative investment education, insights, and data analytics

CAIS, the leading alternative investment platform, today announced CAIS IQ is supporting independent broker dealers and home offices through its membership and sponsorship of two leading trade associations: the Alternative and Direct Investment Securities Association (ADISA) and Institute for Portfolio Advisors (IPA). These sponsorships represent CAIS’s commitment to empowering financial advisors with the education they need to allocate to alternative investments.

“We are happy to have CAIS join ADISA as a new member and sponsor as they work to broaden their relationships throughout the broker-dealer community,” said John Harrison, DBA, Executive Director of ADISA. “ADISA prides itself on broadening access to quality alternative investments by facilitating education, relationships and advocacy. As such, we welcome CAIS to our large coalition and look forward to working with them in the coming years.”

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