Alternative investments such as hedge funds, private equity, venture capital, and real estate have become increasingly popular for institutional and individual investors. As the alternative investment industry grows, the role of heads and chief investment officers (CIOs) has become more important. The head of alternative investments or CIO is responsible for overseeing and managing alternative investment portfolios, conducting due diligence, selecting managers, monitoring risks and performance, and aligning investments with the organization’s goals. This article will explore the key responsibilities and required expertise of heads and CIOs of alternative investments.
Sourcing Deals and Managing Relationships
The head of alternative investments spends significant time and effort sourcing attractive investment opportunities. They build relationships with fund managers, venture capital firms, real estate developers, and other parties to gain access to deals. The CIO may need to screen hundreds of potential investments to select the best options for their portfolio.
Conducting Due Diligence
Heads and CIOs of alternative investments must conduct rigorous due diligence on potential investments. This includes evaluating past performance, investment strategy, risk management, terms and fees, organizational structure, and other factors that determine an investment’s expected return and risk profile. Thorough due diligence is crucial for building a solid portfolio.
Portfolio Construction and Optimization
The CIO is responsible for constructing a portfolio of alternative investments that aligns with the organization’s return objectives and risk tolerance. This requires determining the target allocation to different alternative asset classes and investment strategies. The CIO must optimize the portfolio’s diversification, risk-return profile, liquidity, and other factors.
Risk Management
Alternative investments like hedge funds and private equity can pose complex risks. The head of alternative investments must implement robust risk management processes to monitor market, credit, leverage, counterparty, operational, and other risks. This allows them to identify excessive risks and make adjustments to protect the portfolio.
Manager Selection and Monitoring
The CIO selects third-party fund managers through a rigorous process evaluating track record, operations, strategy, and fit. They must continuously monitor each manager’s performance, risks, adherence to mandate, and other metrics. Underperforming managers may need to be terminated and replaced to optimize results.
As alternative investments become increasingly mainstream, the expertise and oversight of heads and CIOs is more crucial than ever. They must excel at sourcing deals, conducting due diligence, portfolio construction, risk management, manager selection and monitoring to succeed in this rapidly evolving field.