Alternative Investing: The Fairy Tale And The Future

A fairy tale has sustained alternative investing since the Global Financial Crisis (GFC) of 2008. Here I parse the fairy tale and then set the stage for the future of institutional investing. Freed of the misperception that maintaining several asset-class silos is necessary to achieve efficient diversification, institutional investors will begin to simplify asset allocation. Implicit here is the understanding that alternative investments are purely active strategies. Their role in the portfolio is more transitory than that of stocks and bonds, which are the essential building blocks of efficient diversification. Over time, we can expect to see fewer, more comprehensive asset classes; allocators becoming more discriminating in their choice of individual alt investments; and lesser allocations to alternative investments overall. Successful allocators will use many fewer managers and incur lower costs. There really is no other way forward.