The Future of Investing: The Growing Importance of Alternative Assets

In a rapidly evolving investment landscape, the ability to adapt and innovate is crucial for success. Phil Huber, the Head of Portfolio Solutions at Cliffwater, offers valuable insights into his career journey and the strategies that have propelled him to the forefront of alternative investments.

Phil's fascination with alternative investments emerged early in his career. Recognizing the potential benefits of these assets, he sought opportunities to integrate them into client portfolios. This led him to Cliffwater, where he could leverage his expertise to guide wealth management firms through the complexities of alternative investments.

Huber's career trajectory reflects the dynamic nature of the investment industry. His ability to adapt to changing market conditions and embrace new opportunities has been instrumental in his success. As an expert in alternative investments, Phil offers guidance for investors and advisors on this growing asset class.

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Cliffwater's unique origin story is a testament to its commitment to alternative investments. Founded in 2004 by Steve Nesbitt, the firm initially focused on institutional consulting and advisory services. Over the years, Cliffwater expanded its offerings to include asset management, launching its first interval fund in 2019.

One of Cliffwater's notable achievements is its role in creating benchmarks for alternative asset classes, such as the Cliffwater Direct Lending Index (CDLI). This initiative has been instrumental in providing investors with a framework for evaluating performance and risk within the private debt and credit markets.

What constitutes an alternative investment? Phil emphasized that the category is fluid and constantly evolving.

"It's less about what something is, and more about what it isn't. And I often think of it in terms of 'who is it an alternative for?' The definition is often in the eye of the beholder."

Alternative investments challenge traditional categorizations like stocks, bonds, or cash, offering investors unique opportunities beyond the mainstream.

Phil explained that the defining attributes of alternative investments can vary depending on the investor's perspective. For some, alternatives might be Bitcoin or venture capital; for others, they could be private equity or real estate. The key is understanding that alternatives are not confined to a rigid definition and can encompass a wide range of assets.

"This is an evolving definition. Over time, as things become more mainstream, they stop being alternative and become more traditional. But a few different variables affect this definition."

Phil focuses on three factors he believes impact this definition: liquidity, implementation, and packaging. The first is liquidity, like public versus private equity. It's all equity risk. It's just a different access point. A lot of shared economic risk is involved, which is the key differentiating feature.

He then discusses the concept of alternative investment implementation, giving an example of value investing to illustrate how the same investment strategy can be implemented differently, each with unique characteristics and risks.

"Everyone is familiar with the idea of buying something cheaper than its fundamental value. You can implement long-only, buying undervalued stocks and holding them long-term. You can implement it quantitatively in a long-short way by buying undervalued stocks and simultaneously selling overvalued ones. This strategy aims to extract the market beta and be left with that value factor exposure."

Phil rounds out the trio with the third factor – packaging. He compares it to "old wine and new bottles" in the sense that older strategies or ideas can be presented or used differently over time. Recently, they're becoming more widely accessible to a larger audience of investors through innovative structures like interval funds.

"At the end of the day, the objective is to build portfolios that consist of a diverse mix of risk premiums and ways to make money. If we can find a way to make alternatives less alternative, we can think about what we want to achieve, and that will lead to better outcomes."

Who doesn't love getting the best of both worlds? Investors certainly do, and interval funds are lending them a big hand.

Interval funds have gained significant traction in recent years, offering investors a unique blend of accessibility and exposure to alternative asset classes. Phil explains that these funds act as a bridge between traditional mutual funds and private markets, providing periodic liquidity while maintaining the potential for higher returns.

One of the key advantages of interval funds is their semi-liquid nature, which provides periodic liquidity to investors—often on a quarterly basis—allowing them to plan and manage their commitments more effectively, unlike traditional private funds, where capital is typically locked in for extended periods. This flexibility provides a balance between liquidity and access to alternative assets.

Furthermore, interval funds democratize investment in private assets by lowering the accreditation barriers, thus opening up opportunities to a broader range of investors who might otherwise be excluded from the private markets.

While the trend in portfolio management has been towards simplicity and liquidity, Phil argues that alternative investments offer unique value propositions. By expanding the range of risk premiums and diversifying portfolios, alternatives can provide benefits that traditional assets cannot.

A key hurdle in the alternatives space is the relative lack of data and benchmarks. This can make it difficult for advisors to assess performance and risk. However, initiatives by firms like Morningstar are helping to bridge this gap by providing investors with more comprehensive data and analysis.

Interval funds are not without challenges, and the valuation process can be more complex than traditional investments. Advisors integrating alternative investments into client portfolios must grasp their complexities. Navigating this terrain requires foresight from advisors who can tailor strategies to align with individual client objectives. The evolution of these funds demands adaptability and a proactive stance in understanding how emerging financial technologies and regulatory shifts can impact their effectiveness. Investors should carefully consider these factors before investing in interval funds.

Looking ahead, Phil expressed optimism about the future of alternative investments. He highlighted the potential role of interval funds and other evergreen structures in expanding access to these assets and democratizing investment opportunities. The growing interest in alternatives suggests they will play an increasingly vital role in diversified portfolios.

"Interval funds are at a similar inflection point that ETFs were 20 years ago. ETFs were once a small niche, but now they're a dominant investment vehicle. I remember the skepticism surrounding ETFs when they first emerged, but now they're widely accepted," says Phil.

Understanding and leveraging these trends can provide entrepreneurs, small business owners, individual, and institutional investors a significant edge. The landscape of interval funds underscores a broader trend wherein traditional investment boundaries are being reevaluated.

As with any investment, the mantra is clear: due diligence is crucial, and learning from experienced financial experts, like those at Cliffwater, can provide the insights necessary to harness the potential of interval funds while mitigating associated risks. In doing so, advisors and investors alike can position themselves at the forefront of this exciting development within the investment sphere.