How to Use Alternative Investments With Phil Huber [LIVE] (EP.163)
Jul 31, 2024
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Phil Huber, Chief Investment Officer and author of 'The Allocator’s Edge,' dives deep into the world of alternative investments. He discusses why traditional portfolio strategies may struggle in today’s market. Huber highlights the explosive growth of private credit and its significance for investors. He also sheds light on interval funds, showcasing their advantages over traditional structures. This conversation is packed with insights for both financial practitioners and individual investors looking to navigate the changing landscape of investments.
Alternative investments are increasingly vital as traditional 60/40 portfolios struggle to meet investors' financial goals amid changing market dynamics.
Private credit is rapidly growing due to banks retreating from middle-market lending, presenting unique opportunities for savvy investors.
Deep dives
The Rise of Alternative Investments
The conversation highlights the increasing significance of alternative investments, particularly in the context of a shifting financial landscape. Traditional asset allocations predominantly involving stocks and bonds are encountering challenges, prompting investors to explore alternatives like private credit and equity. The historical reliance on a 60-40 portfolio may no longer be adequate, as recent trends demonstrate a decline in the expected returns from these traditional assets. As alternative strategies evolve and become mainstream, education and understanding of these investment avenues become crucial for both financial advisors and individual investors.
Understanding Private Credit Growth
The growth of private credit has been largely attributed to banks retreating from lending to middle-market companies following regulatory changes after the financial crisis. This shift has opened opportunities for private lenders to fill the financing gaps left by traditional banking institutions. With the private credit market now constituting a significant sector of corporate financing, understanding the differentiation between private credit's various forms becomes essential for investors. By leveraging metrics such as the Cliffwater Direct Lending Index, investors can assess performance benchmarks, further demystifying the private credit landscape.
The Importance of Interval Funds
Interval funds have emerged as a crucial mechanism for investing in alternatives, providing practical solutions to the operational complexities associated with traditional private equity investments. These funds allow for easier access, lower minimum investments, and simplified tax reporting compared to conventional limited partnership structures that often discourage advisor participation. The rapid growth of interval funds indicates a burgeoning acceptance of alternative strategies among advisors looking to offer diversified investment options to their clients. However, it is essential for advisors to manage client expectations over liquidity and performance metrics, reinforcing the difference between these funds and traditional mutual funds.
Navigating the Complex Alternative Landscape
The alternative investments sector is vast and varied, calling for a nuanced understanding of asset allocation strategies. Factors such as client objectives, liquidity needs, and tax implications play significant roles in determining how various alternative assets fit into a portfolio. As advisors cautiously incorporate alternatives, they must focus on educating clients about potential risks associated with uncorrelated asset returns to establish realistic expectations. This involves recognizing that not all alternatives will behave as hedge against market volatility and that informed decision-making is vital in optimizing a comprehensive investment strategy.
If you want to maximize your investing returns beyond what traditional methods offer, discover leading edge opportunities, or simply stay up to date on the latest investing trends, alternative investments may be for you. The pursuit of diversification is not as straightforward as it once was — and the classic 60/40 portfolio may no longer be sufficient in helping investors achieve their financial goals. Alternative assets are emerging and may start to play a more prominent role in future investor portfolios.
This episode is recorded LIVE from the 2024 Morningstar Investment Conference with Phil Huber. He's the Chief Investment Officer for a multi-billion dollar wealth management firm and author of The Allocator’s Edge: A Modern Guide to Alternative Investments and the Future of Diversification.
Listen now and learn:
Why traditional asset allocation strategies may face challenges going forward
How private credit has emerged as one of the fastest growing alternative asset classes
The benefits of interval funds relative to traditional drawdown funds