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WALL STREET JOURNAL | Firm Makes Alternatives Easier to Handle

  • Alternative investments gaining in popularity
  • But it’s hard for distributors to see which alternative shops are well run
  • CAIS gives independents view on alternatives like that of big-name rivals

Alternative-investment platform provider CAISĀ and institutional consultant Mercer Investment Consulting have teamed up to offer independent and small-shop wealth advisers operational support they say is on par with big-bank offerings.

Alternative assets–including hedge funds, real estate and private equity–have grown in popularity since the dot-com meltdown 12 years ago. In 2010, 34% of institutional investors said at least a quarter of their holdings were in alternatives, according to Morningstar.

Though alternatives suffered in the downturn of 2008, they seem to have regained investor confidence. Their reputation as moneymakers aside, investors see them as a way to cushion their portfolios from widespread capital-market volatility.

Regulation, high minimums and the fact they can’t be turned into cash as readily as stocks and bonds means that most alternatives are only suited to retail investors with at least $1 million to work with. Although more “liquid” mutual funds and ETFs that claim to mimic hedge funds and the like are gaining ground, they don’t wholly capture the risk-and-return profiles of the real things.

In addition to limited distribution and competition from mimics, retailers who want to give clients a broad choice of alternatives have to make sure they’re being run on the up-and-up–especially since the Madoff scandal rocked the world three years ago.

Alternative-investment trouble “of the last decade wasn’t the result of bad management; the fault was operational failure, a total breakdown of control” whether intentional or not, says David Eisenberg, a senior investment professional with Mercer in Boston.

CAIS’s chief executive Matt Brown agrees. “Operational failure is a big concern–and Mercer is excellent when it comes to operational due diligence processes.”

Big firms like JPMorgan Chase (JPM), Morgan Stanley (MS) and Merrill Lynch have long had due-diligence platforms to make sure the alternatives they sell private clients come from well-managed companies, says Brown. But small banks and most independent wealth managers simply can’t afford to build alternative-review platforms that are sufficiently robust.

And that’s where CAIS comes in. Besides Mercer’s operational due diligence on alternative managers, CAIS sells small firms the wherewithal to access alternative-manager research, construct portfolios with lower-than-advertised minimums and monitor and report on outcomes.

CAIS, which launched in January 2011 after more than a year of development, only works with wealth managers and other private-client outfits. That’s a strategic focus based on CAIS’s assessment of the private-wealth segment as the distribution channel “most in need of infrastructure support for alternatives,” says Brown.

Among the companies that use New York-based CAIS’s services are wealth-firm aggregator Focus Financial, hybrid brokerage-investment advisory HighTower LLC and broker-dealer Jefferies‘s wealth-management group.