Wealth Outlook 2024 - Slow then grow

46 Wealth Outlook 2024 | Portfolio views Alternative investing in 2024 yield above traditional credit and equity exposures. A conservative approach may emphasize diversifying and yield strategies while someone with a more moderate or aggressive profile might add more directional strategies to the mix. Liquidity needs and parameters The benefits of adding alternatives to a diversified portfolio are potentially significant, but as noted, these benefits come at the cost of illiquidity. Illiquidity means that some of these strategies have limited or no redemption periods when clients need to access their funds. This requires a holistic evaluation of an entire portfolio within the context of one’s time horizon and liquidity. What are your short- and long-term cash needs? Even the most liquid “liquid alts” funds will only provide for monthly or quarterly cash-out options, not daily. And some strategies will lock up capital for years in seeking to generate returns. Understanding one’s cash needs is among the first risk analyses to be done when setting the portfolio parameters and selecting potential investment opportunities. Paths to execute the plan Once you have established the objectives and risk tolerances, you may want to consider a portfolio of individual funds and co-investment holdings or utilize a third-party investment manager for fund/deal selection. An advantage of building a portfolio of individual investments is customization and one less layer of fees; one of the downsides is the added due diligence required by you and your financial professional. A third option may be to outsource manager/fund selection to a platform fund or fund of funds that invests across multiple managers (and often across multiple strategies), accessing ideas of professionals dedicated to each asset class and strategy. Take a long term approach For hedge funds, one can meet an allocation target over a relatively short period of time and then manage exposures dynamically. However, private equity, private credit and real estate take a longer- term plan and implementation period, because they are typically structured as drawdown vehicles that have a finite term. They call the committed capital over a period of three to five years as suitable investments are identified and funded to fill the portfolio. Then invested capital and gains are distributed to investors as the individual portfolio investments are sold over a total fund life of eight to twelve years. Investors may get impatient and try to fully allocate to the asset class in the first year, when the preferred option should be to build a sustainable exposure over time. A rushed approach can then create more angst on the back end as well. We suggest working closely with your investment professional to determine your expected liquidity needs, then developing a slow and steady plan you can stick with over many vintage years.