CAIS And Morgan Stanley On Accessing Alternative Investments

Larry Wilson, Managing Director of Structured Derivatives, Americas, for Morgan Stanley, and Matt Brown, Founder, Chairman, and CEO of CAIS, joined Keith Black, Managing Director of RIA Channel, to discuss how advisors’ access to alternative investments is evolving.

CAIS was launched in 2009 to level the playing field by bringing access to alternative investments to RIAs. The CAIS-Mercer Survey finds that 85% of surveyed advisors plan to increase allocations to alternative investments in 2024, with almost 30% increasing allocations to structured products. Brown notes that $10 trillion in new investments will be allocated to alternatives over the next decade, moving the 60/40 portfolio toward 50% equity, 30% fixed income, and 20% alternative investments.  Alternative investments include private equity and venture capital, hedge funds, private real estate, private credit, and structured notes. Mercer reviews all alternative investments offered on the CAIS platform.

The structured alternatives group within the institutional securities group at Morgan Stanley offers derivatives-based solutions to institutional investors and high-net-worth individuals represented by RIAs.  Many high-net-worth individuals with concentrated stock positions and seeking to use derivatives for hedging or capital protection.  Because it can be expensive to continually buy and renew call option protection, many individuals opt for derivative-based products such as call overwriting, costless collars, and prepaid variable forwards to reduce hedging costs.

Structured notes may be an investment solution for an investor who has accumulated substantial wealth and is approaching retirement.  Consider the example of a principal protected note with a 5-to-10-year maturity covering the investor’s final working years and the beginning of retirement.  Instead of earning investment-grade bond yields, the investor can participate in the potential upside of equity markets.  A principal-protected structured note combines a Morgan Stanley bond issue with call options on an equity index.  If equity markets decline over the product’s life, the investor receives the principal back at the maturity of the bond issue.  If equity markets rise, the investor receives their principal plus a defined outcome based on the upside return of the equity market.

CAIS sits at the convergence of three tailwinds: the growth in wealth management, the growth in alternative investments, and technology solutions that make investing faster and easier.  Portfolios of high-net-worth investors are increasingly becoming more institutional in nature, while asset managers are designing products specifically for the private wealth channel. Previously, asset managers worked largely with institutions that could each write a $50 million check.  New structures allow that same $50 million to include allocations from hundreds of individual investors while evolving from institutional drawdown structures to fully funded vehicles.

The most difficult parts of advisors accessing alternatives are education and operations.  CAIS offers a technology platform that connects financial advisors with alternative investments, with pre-trade, trade, and post-trade solutions.  Before the trade, advisors are provided educational resources to understand each investment and be able to clearly explain the offerings to their clients.  The trade process facilitates documentation through digitization, streamlining the previously cumbersome process of documenting subscriptions to alternative funds.  Post-trade, CAIS facilitates the monitoring of investments through technology, reporting returns in a timely fashion through custodians.

Each investment product needs an asset manager and distribution.  The CAIS platform connects to thousands of advisors who control over $4 trillion in assets. Morgan Stanley partners with CAIS to offer structured notes and derivative-based products to advisors and their clients.

Resources:

Webcast Replay: Equity Risk Management for Concentrated Single Stock Positions and Tailored Portfolio Solutions

An Introduction to Downside Protection with Structured Notes