The Greenwich Roundtable has released a white paper describing how investors can manage complexity of alternative investments to improve their returns.
The Greenwich Roundtable is a leading not-for-profit research and educational organization comprised largely of institutional investors overseeing collectively USD2.2 trillion in assets.
The research paper focuses on understanding the many and varied risks involved in hedge funds and private equity, and describes the best practices and due diligence steps that investors need to pursue to manage those risks. The white paper also explores the complexity of volatility, leverage, and liquidity and how these factors together can compound risk.
"Complexity and volatility are the norm for investors, as today we seem to have a 100-year financial storm about every three years or so. As a result, returns for the decades ahead are almost assuredly going to look much different," says Steve McMenamin, executive director of The Greenwich Roundtable. "Those investors who can manage volatility and understand the complexity embedded in their portfolios will continue to be the long-term winners."
The major insights described in the white paper include:
The cost of alternatives strategies is the complexity they add. The benefit is the ability to source returns from a broader spectrum of opportunities.
Correlations matter, and they vary through time. Investors must try to understand the changing nature of relationships across their portfolios.
Investors need to understand how each manager approaches leverage and evaluate the appropriateness of the amount and duration of that leverage.
Liquidity is dynamic. It changes as markets change. This calls for ongoing due diligence and manager monitoring, including stress tests and projections with ample wiggle room.
"Each investor must decide whether it is adequately prepared to invest competently in alternative investments," says Rusty Olson (pictured), former director of pension investments for Eastman Kodak Company and editor of this year’s research paper. "This paper is intended to help investors make that judgment knowledgeably."
This is the sixth in a series of white papers on Best Practices in Alternative Investments published by The Greenwich Roundtable. This new research paper reflects the thinking of a highly diverse group of contributors who have extensive investment experience. Co-chairmen of the education committee responsible for the research paper are Mark Silverstein, chief investment officer of Endurance Specialty Holdings Ltd., and Ed Barksdale, CEO of Federal Street Partners.
The research paper is written for all investors – endowments, foundations, pension funds, sovereign wealth funds, funds of funds, and private individual investors.