What Makes an Alternative Investment: My Conversation with Jane Buchan

TL;DR: What makes an alternative investment, how "alts" progress from adolescent to mature, and why operational and custody risks matter just as much as volatility.

When I worked for the Ziff family, I went to an "alternative investing" conference. The exact date I forget, but it must have been late 2008 or early 2009 — aka the dark days of the Global Financial Crisis.

My boss at the time, Alec Crawford, insisted that we go to conferences even though it took us out of the office for a few days. To him, making sure that we were plugged "into the conversation" was worth the otherwise presumed reduction in short-term productivity.

That's a lesson I still carry with me.

At that conference, there was a panel session on Funds of Hedge Funds, or Funds of Funds (FoFs) to keep it tidy.

This was not a time for high fives and victory laps in the fund-of-funds world. Among other things, funds of funds had played a meaningful role in funneling money to Bernie Madoff in the years that led to the scheme unraveling.

On stage were three people. Two of them, I could not tell you who they were then or now. The last one was Jane Buchan.

At the time, Jane ran the firm she had co-founded, Pacific Alternative Asset Management Company, or PAAMCO (By the time she retired from PAAMCO, the firm managed about $32 billion in assets).

Having recently "left academia," I was probably looking for people in the industry that I could identify with. Jane was immediately one of those people. She was thoughtful, balanced, and in clear control of her craft: investing in alternative assets and strategies. I thought to myself, if there are people like Jane in this profession, then I'm good to stick around.

I never thought I would get to know Jane personally.

I did.

It turns out Jane is exactly that person that I saw on stage then.

I recently spoke to Jane on TREUSSARD TALKS.

We—obviously—talked about alternative investing.

We talked about what makes an investment an "alt."

Whether it's an asset (like crypto) or a strategy (like a long-short hedge fund), an alternative is a thing that diversifies your portfolio return profile beyond the mainstream of asset classes. In other words, it's an alternative relative to mainstream assets. Not mind-blowing, but people seem to forget the basics.

• Some alternatives are mature and possibly drifting into the mainstream, i.e., they are well traveled, generally well governed, and widely held, like private equity, and to a lesser extent, hedge funds. As Jane put it, at that point, "the kids have gone off to college and it's kind of very set."

• Some alternatives are not fully mature but probably resemble young adults well on their way to maturity, like private credit and direct lending. At that stage, “there's some rules going on, but not everything's totally formed"

• Some alternatives are like teenagers, with a reasonable distance to cover before they can be deemed mature. In Jane’s mind, crypto is “clearly the adolescent.”

Nothing is good or bad, it’s just stages of development, whether or not something is a diversifier for a “mainstream portfolio” (and at what cost), and what the risk profiles look like.

Jane makes an important point on risk, one that is worth thinking about always, but particularly these days.

People often think about the risk in terms of volatility of the asset value.

Sure, that’s first-order important.

But there are other risks that people often forget.

Case in point: crypto.

Bitcoin went from effectively zero dollars for one BTC to north of $100,000 these days.

Presumably, if you bought BTC when it was worth $1000, let’s say, quick math would suggest you made a 9,900% return. That's 100 times your money.

But you might have stored your bitcoin at Mt. Gox, which was hacked in 2014, at which point your “wallet” might have gotten wiped out. No $100,000 BTC for you. Instead a 100% loss, due to theft.

The point is simple.

You should think a lot about operational risks, custody, and other forms of asset protection in the mainstream of investing.

But the moment you step into “alt land,” that becomes pretty close to job #1, right alongside the risk-return question inherent in the simple fact that prices move up and down over time.

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