CEO Executive AssistantAlternative investments, including private equity, hedge funds, real assets, infrastructure, and other non-traditional investment strategies, require specific delegation frameworks that address their distinctive characteristics: illiquidity, complexity, long investment horizons, and high operational demands. Finance CEOs leading institutions with significant alternatives exposure must ensure that governance keeps pace with the sophistication required to manage these investments well.
Alternative Investments in Institutional Portfolios
Alternative investments appear in several institutional contexts:
Institutional investor portfolios. Pension funds, endowments, and sovereign wealth funds allocate significant portions of their portfolios to alternatives. Finance CEOs overseeing investment management for these institutions must govern alternatives allocation and oversight.
Insurance company general accounts. Insurance companies invest in alternatives as part of their investment portfolio management.
Proprietary investment platforms. Some financial institutions operate alternative investment platforms as a business line, managing capital from multiple investors.
Each context has different governance requirements, but the delegation principles are broadly similar.
Delegating Alternatives Investment Management
CIO and Alternatives Leadership Authority
The CIO should own the overall alternatives investment strategy, with dedicated alternatives leadership for specific asset classes:
Head of Private Equity. Owns sourcing, due diligence, execution, and portfolio management for private equity allocations.
Head of Real Assets. Owns real estate, infrastructure, and other real asset investments.
Head of Hedge Fund Allocation. If the institution allocates to external hedge fund managers, this function owns manager selection, portfolio construction, and monitoring.
Each of these leaders should operate within CEO and board-approved allocation parameters and risk budgets.
Investment Process Authority
Alternative investment decisions should follow defined governance processes:
Investment Committee governance. Alternatives investment decisions above defined thresholds should require Investment Committee approval.
Due diligence standards. Minimum due diligence requirements for alternatives investments should be defined and consistently applied.
Fee negotiation authority. Authority to negotiate management fees and carried interest with alternative investment managers should be defined, with significant fee decisions requiring senior approval.
For context on how alternatives governance integrates with broader investment oversight, finance CEO delegation covers the governance framework.
Liquidity Management for Alternatives
Alternatives illiquidity creates specific governance requirements:
Liquidity risk policy. The overall exposure to illiquid alternatives relative to total assets should be governed by a policy approved at the CEO or board level.
Vintage year and manager diversification. Concentration risk in alternatives should be managed through diversification policies.
Cash flow management. Capital calls from alternatives managers require liquidity management coordination with treasury.
Exit strategy planning. For long-duration alternatives investments, exit strategy planning should be conducted well in advance of anticipated investment maturity.
Operational Risk in Alternatives
Alternatives investments carry significant operational risks:
Valuation complexity. Alternatives valuations are inherently more judgment-dependent than public market valuations. Independent valuation processes with governance oversight are essential.
Operational due diligence. Evaluating the operational quality of external alternatives managers is distinct from investment due diligence. A dedicated operational due diligence function reduces the risk of allocating to managers with inadequate operational controls.
Data and reporting quality. Alternatives managers vary significantly in their reporting quality. Finance CEOs should ensure that reporting standards are defined and enforced.
Fraud risk. Alternatives investments have historically been a vehicle for fraud. Robust due diligence and monitoring processes are essential.
The finance delegation guide addresses how alternatives investments compete for capital allocation.
Manager Selection Delegation
For institutions that allocate to external alternatives managers:
Manager research. Systematic research on the alternatives manager universe belongs to the investment team.
Initial screening. A defined screening process filters the manager universe to a manageable due diligence universe.
Due diligence. Full investment and operational due diligence on selected managers requires specialist teams.
Approval authority. Final manager approval should follow a defined process with committee governance for significant new allocations.
Monitoring. Ongoing monitoring of approved managers for both investment and operational quality belongs to the investment team.
Compliance and Regulatory Requirements
Alternatives investments create specific regulatory compliance requirements:
Investment adviser regulations. Investment advisers managing alternatives face regulatory requirements around disclosure, conflicts of interest, and valuation.
Accredited investor requirements. Alternatives investments typically require investors to meet accredited investor or qualified purchaser standards. Verification processes must be systematic.
Reporting requirements. Large investment advisers in alternatives are subject to reporting requirements to financial stability regulators.
Measuring Alternatives Delegation Effectiveness
Finance CEOs should evaluate alternatives delegation through:
- Investment performance relative to benchmarks and peer groups
- Manager selection quality (performance of selected managers relative to the manager universe)
- Operational quality of managed and third-party managed alternatives
- Liquidity management relative to cash flow requirements
- Regulatory examination outcomes
Conclusion
Alternative investment delegation requires finance CEOs to invest in specialized investment and operational leadership, design governance structures that address illiquidity and complexity, and maintain CEO engagement with alternatives strategy, risk appetite, and significant investment decisions. Finance CEOs who build effective alternatives governance lead institutions that can access the diversification and return premium that alternatives can provide while managing the operational and governance risks that come with the complexity and illiquidity that characterize this asset class.
Related Reading
For further context, explore Finance CEO Delegation for Asset Management and Finance CEO Delegation for Business Development.