The investors with an appetite for that type of exposure, he says, are the multimillionaires who would typically have several million dollars’ worth of investable assets, making them eligible for the label of “accredited investor” or its equivalent, depending on where they are in the world. While that level of wealth technically makes them eligible for traditional nonregulated products, the price of entry for those vehicles generally have investment minimums akin to a million dollars, which effectively limits their ability to properly diversify their portfolios.
“By creating products that provides lower investment minimums, and more frequent liquidity than traditional alternative products, firms allow diversity of access,” Lee says. “They’re effectively opening up that market to a group that otherwise could be limited because of the inability to deal with certain concentration and liquidity risks.”
While alternative managers may be eager to expand access to their strategies into the mass affluent market, they’ll also have to consider a few factors. For one thing, alternative managers have traditionally dealt with several hundred clients at the most. But as they look to create more liquid options for their strategies, they should prepare to serve an increased volume of customers, which will exponentially increase their need to deliver effectively on several fronts.
“As you’re dealing with these increased volumes, you as an alternative manager have to rethink how you process reporting, client service, and all those other aspects of your offering aside from running the strategy,” Lee says. “That means having the ability to scale with technology, to be able to accommodate these increased volumes.”
Another key consideration centres on education. Alternative managers will have to inform potential investors about the potential risks of investing in an alternative product, including liquidity risk, complexity in the underlying investments, limited ability to access invested capital, and tax challenges in some jurisdictions, just to name a few.
