How Investors Can Access Alternatives

06/25/2012 7:15 am EST


Historically, only institutions and wealthy individuals had access to many alternative-investing categories. CAIS co-founder Rafay Farooqui explains why such non-correlated assets have a role in individual portfolios, and why his company was formed to address that area of the market.

Kate Stalter: Today, our guest is Rafay Farooqui, a cofounder of CAIS. Rafay, I want you to begin today by explaining your business model. I understand that you create alternative investment platforms for advisors, so say a little bit more about what you do and why you got started—where you saw the need.

Rafay Farooqui: Sure. Thank you for having me. CAIS is the leading alternative platform providing an end-to-end solution for alternative investments for the independent wealth-management space, both in the US and internationally.

What we identified early on was that the independent wealth-management professionals, the advisors and the private bankers, were lacking the infrastructure that the large competitors—the large banks, the broker-dealers—had built for their investment advisors.

Essentially, what was needed was a turnkey alternatives platform that allowed you to invest very easily and efficiently with all the documentation necessary that was needed in an efficient manner to have those positions report efficiently for their clients. And then to have a robust infrastructure that provided the adequate institutional-level due diligence on each one of those products to make them widely available to the wealth-management industry and their clients at large.

What we noticed was that that was available at the biggest banks, because they had the resources and the distribution capabilities, and what we figured out was that for the independent space there was a need. That was the hole that we tried to fill.

Kate Stalter: It seems that you are probably at a very good space right now, as more and more clients want to gravitate toward the independent advisors, rather than the wirehouses?

Rafay Farooqui: I think we had seen that trend early on, and we continue to see that trend, whether it is disenchantment or just time to move on, that many of the more meaningful teams and advisors at large that live within the wirehouse have joined this breakaway movement.

CAIS was specifically built to provide the infrastructure solution in the alternative space as an end-to-end platform that the banks had internally to the independent space. As a complement to our business, the timing also turned out to be right, because we also benefit from the large breakaway movement.

Kate Stalter: Say a little bit about how your products are structured. Are they designed to be used in separately managed account form, or mutual funds and ETFs that consist of alternatives these days? How does that work?

Rafay Farooqui: CAIS addresses the alternatives market broadly, so whether that is hedge funds, private equity, other asset classes that may be termed alternative, that is where we look to provide the solution. Because we find that that is the most difficult area for advisors to get educated and execute and add diversified portfolios in.

What we have found is that alternatives in general tend to lend themselves to different structures, depending on the strategy. So we never want to put a round peg in a square hole, and take the manager and structure them in a liquid alternative, if you will, if the strategy doesn’t lend itself to that.

What CAIS focuses on is to essentially bring the LP [limited partnership] investing experience to a lower minimum to the wealth-management industry as a whole. Currently, we don’t offer managed accounts, and we don’t offer mutual funds, but we are in the LP space, the 3(c)7, the 3(c)1 vehicles, and also in the 40 Act space.

Kate Stalter: Let’s walk through how this might work. If I were a client of an advisor, and I walked in and said, “I am interested in the alternative space,” or the advisor looked at my portfolio and said, “We really want to get you some exposure to some of the alternatives,” how would they work with you? What would that look like?

Rafay Farooqui: So our client is the advisory firm, whether it is the registered investment advisor, the independent wealth manager, or the private bank that doesn’t have their own platform. We focus on servicing the advisor so that they are educated on the product and they have a means, in a turnkey way, to invest in some of the leading alternative managers, whether it is in hedge funds or private equity or in the alternative spectrum.

We tend to work with the biggest and best advisory firms. If you are a client of one of those advisory firms that has partnered with CAIS to have the platform available, essentially you are looking for diversification of capital and appreciation of that capital with a reasonable risk.

So the client goals are essentially, or the advisor’s goals when they are dealing with the client, is to diversify that portfolio, bring the correlation to the market down, bring the volatility down, and diversify with an adequate level of risk.

Alternatives are supposed to play that role in a portfolio, whether it’s a hedge fund or private equity. The problem as been that in the past many of the best managers in the alternative space have required very high minimums for their investors and mainly have attracted institutional capital.

So what CAIS does as a solution is partner with the managers and bring the efficiencies to the wealth advisor of due diligence in making sure that what they are investing in is due diligence and watched by institutional partners like Mercer Investment Consulting—that is our due diligence partner. And we also then structure the vehicle so that the private banker or advisor is able to allocate for their client in smaller dollar amounts, $100,000 minimums or less.

What that allows is for them to have access to some of these managers that have lower correlations to the market, have lower volatility and a reasonable return over time.

Also, alternatives’ role in a portfolio is really to play, to get exposure to strategies or a part of the market or the asset spectrum that you can’t otherwise express in public securities. That is really what the client of an advisor should be asking their advisor: Can you get me access to something that is differentiated but I can’t express currently in my portfolio? More so often than not, the answer is access to some of these managers that are on the CAIS platform.

Kate Stalter: You said a couple of things there that I wanted to follow up on. Mainly, the lack of correlation. Obviously, one of the problems that a lot of advisors and even individual investors are aware of these days is the high degree of correlation among asset classes that historically have not been highly correlated. Are you seeing more demand for these products, in light of that going on?

Rafay Farooqui: That’s right. I think that the risk aversion after 2008 still continues to persist in the market. To the extent that an advisor is going to add one of the CAIS products into the client portfolio, they are looking for something that does something different, a strategy and a manager that is looking at a part of the world or a part of the asset structure that is inaccessible, that has an opportunity in it, and really doesn’t behave in correlation with the wide public market.

Kate Stalter: So our listeners today are mostly the retail investors. If they are intrigued by what you are saying here, what would be their next steps to get more information about these platforms?

Rafay Farooqui: Well, as CAIS serves the leading advisors in the US and internationally, what I would advise to your listeners now who are clients of our advisors is to pick up the phone and speak to them about alternatives.

Understand if that is an appropriate asset class for them to diversify into, and then suggest to their advisor that if they don’t already have access to the CAIS platform, that they call us at CAIS so that we can partner with them to deliver this investable solution so that they can diversify that client’s portfolio.

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