The Chartered Alternative Investment Analyst (CAIA) Association is the professional body for alternative investments.

The CAIA has issued a comprehensive report “The Next Decade of Alternative Investments: from Adolescence to Responsible Citizenship” based on a survey of over 1,000 CAIA members.

The report expresses the Association’s thoughts on the future of alternative investments, as well as its four-point call to action for the industry. As we are confronted with memories of the 2008 financial crisis amidst the current coronavirus pandemic, here is a thought-provoking observation from William J Kelly, CEO of the CAIA Association:

“The dozen years since the Global Financial Crisis, when so many markets were moving up in lockstep, perhaps gave investors a false sense of security and caused them to be less focused on such key concepts as diversification, volatility, price discovery, and liquidity; COVID-19 has brought them all back into play with shocking swiftness.”

The report includes a 15-year look back at the industry, an examination of the imperatives driving investment in alternatives, and the future of institutional alternatives.

2013 – 2018, and beyond

Alternative investments grew from 6% to 12% of the global investment market during this period. The report observes that lower interest rates propelled investors towards alternative investments. “The spread between assumed pension returns and Treasury rates as wide from 2.8% in 2007 to 5.3% at the end of 2019,” it observes.

Institutions could therefore either cut benefits, increased contributions or find new sources of returns. The first and third options have been most popular.

Alternative investments offer the allure of higher returns. Therefore, CAIA members expect their component in the global investable market to again double to 18-24% by 2025.

What would drive investors to alternative investments?

The two main reasons that justify alternative investing are to enhance returns together with reduced risks. However, the under noted chart shows members’rationale for investing in alternatives.

Future of institutional alternatives

This section covers members’ views on factors likely to drive future growth in alternative investments in the coming decade. It is “a deep dive into the growth drivers of the underlying industries and asset classes.”

Insights include manager due diligence, the popularity of co-investments, trends in private debt, expectations for hedge fund outperformance, growth of liquid alts and ESG.

Call to action

“With our four-point agenda below, we hope to change our industry to benefit future generations of workers and savers,” the report concludes.

CAIA’s four-point action plan calls on practitioners to –

• Commit to Education;
• Embrace Transparency;
• Advocate for Diversification; and
• Democratize, but Protect.

“In our view, fiduciaries should neither blindly endorse nor demonize alternatives. Instead, continuous education, rigorous due diligence, transparency, and thoughtful reform should stand as the pillars of the profession.”

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