For 40 years, investing in alternative investments was (relatively) easy. That era is over.

Private investments barely started 40 years ago. Now they are ubiquitous in the wallets of dispatchers, and many of them want to put even more capital to work. But today’s market conditions are now significantly different: yields are stable, inflation is on the rise and geopolitical risk is back in the market.

The CAIA Association, a professional alternative management organization for 20 years, does not leave the future to chance. Instead, the organization is releasing a new guide, called Portfolio for the Future, on capital allocation on Thursday.

“While we’ve had misfires or mini-cycles over the past 40 years, we’ve largely had a tailwind in which the 60-40 portfolio works well,” said John Bowman, executive vice president of CAIA, speaking from Los Angeles on Wednesday. Additionally, Bowman says investors are returning to a “more normal environment.” In other words, recipients cannot expect their performance this year to match the records of 2021.

Marcus Frampton, chief investment officer of the Alaska Permanent Fund, agreed. “I think every market has had a tailwind since the early 1980s,” he said over the phone. “We’re at that inflection point where it’s going to start going in a different direction.”

With a whole new set of market dynamics, CAIA recognized that investors like Frampton could be disappointed with alternative investments if they used the same playbook.

“The good times rolled around and outsized returns (both absolute and risk-adjusted) persisted, and still do to some degree, in the thin air of the top decile of the respective alternative investment performance universes,” Bill wrote. Kelly, President and CEO of CAIA, in the guide. “This party hasn’t ended but has gotten much more complicated. Efficiency and scale are hallmarks of beta, and the legendary Jack Bogle has built an entire investment discipline around the concept of getting (and take) what the vast market has to offer.Maybe the alpha isn’t really dead in alts space, but it’s definitely transitioned into an altered state of a new reality.

The guide highlights five characteristics of effective investing, including diversification, with an emphasis on private and illiquid assets. Investors also want managers who actively engage in society-centric results, rooted in a fiduciary mindset and focused on generating what they call operational alpha, according to CAIA.

For investors, the central question is how to find alpha in the future. It starts, according to CAIA, with diversification. Although “owning the market portfolio” has long been a widely accepted strategy, CAIA suggests that diversification is more complicated for truly long-term investors.

“Long-term investors define diversification differently, looking at all asset classes and paying particular attention to the interactions of investments in different parts of the portfolio,” wrote Ariel Fromer Babcock, head of research at FCLT Global, in the guide.

Mark Anson, CEO, President and CIO of Communfund, said Institutional investor that there is a beta continuum – passive exchange-traded funds of all kinds, including those with exposure to cryptocurrencies and return flows from convertible arbitrage – exist on it. The beta universe is no longer just a passive approach to capturing equity risk premia, argues Anson. There are real diversification benefits here.

As a result, investors can start with the beta and layer on more private assets, such as credit, stocks, and other alternatives. It works, but only when investors outperform. The guide makes it clear that investors should select the right manager for the job. According to data included in the guide, the dispersion between the median performance of global private equity managers and the top fifth percentile is 32.7%. For venture capital, this dispersion is 40%. “Unfortunately, aggregate data on the performance of private equity funds remains misleading and does not provide insight into how an average investor might feel with a performing, inferior or average fund manager,” according to Portfolio for the Future. “The skill required to select good managers is just as important, if not more so, than having access to them in the first place.”

“If you do the alts right, it can really be a bigger return driver,” Frampton said. “These data reinforced my point of view.” He added that commodities and macro-hedge funds look set to do well over the next decade, and that’s where he plans to focus some of his private investments.

To implement these investments, CAIA maintains that culture is also essential for sponsors and general partners.

“The more I talk to CIOs, the more I hear about the power of a healthy culture,” Bowman said.

According to Roger Urwin, head of investment content at Wilis Towers Watson, this can translate into explicit values ​​such as “a focus on results and experiences over relevant time horizons, fair fees and rewards, and substantially transparent, accurate and authentic communications”.

Some dispatchers express these values ​​in their own operational frameworks. The California State Teachers’ Retirement System has its collaborative strategy, for example, while the Yale Investment Office has its endowment model. “What you can’t do is just import the model,” Bowman said. “These have great lessons for us, however.”

According to researcher Ashby Monk, what makes them successful is not simply that these funds are able to express a certain investment style and a certain set of values. It’s that they’re exploiting their operational strengths—their advantage, if you will.

These advantages are both structural (in Yale University’s endowment, it’s the strong alumni pool, for example) and cultivated, which can feel like a family office pursuing micro-enterprise opportunities. that a sovereign wealth fund is too big to access.

“True investment outperformance among dispatchers tends to come from an investor correctly identifying their structural advantages and then allocating resources to further cultivate them in unique ways,” Monk wrote.