Although alternative investments may not be an area of focus for all advisors, investment professionals of all kinds should be better educated about these products as they gain prominence in clients’ portfolios, according to groups in the alternative investing industry.

The calls for greater industry expertise have recently gained momentum as instances of market volatility and investment fraud have displayed the far-reaching impacts that hedge funds, commodities trading and other alternative strategies can have on investors around the world.

“There have been numerous events that have occurred in the marketplace, especially over the last year, that have demonstrated that even if you are not directly involved in this space, you could be impacted,” says Craig Asche, executive director of the Amherst, Mass.-based Chartered Alternative Investment Analyst Association. “If you are not aware of how those areas operate, and what their involvement is, you can very easily be broadsided.”

CAIAA has witnessed its membership growing in tandem with alternative investing. The non-profit group is the sponsoring body for the chartered alternative investment analyst designation — a program similar to the chartered financial analyst designation, but focused specifically on investing in hedge funds, real estate, private equity, commodities and managed futures.

More than 2,600 professionals have earned the global designation and thousands more have applied as candidates since its inception in 2002. The designation has experienced annual enrolment growth of roughly 70% as a wide range of professionals — from advisors and consultants to fund managers and compliance personnel, and even those not directly involved in the asset class — pursue education in alternative investing, Asche says.

The program has become particularly popular among financial advisors as retail investors are showing more interest in alternative investments.

Even investors without a particular interest in the asset class probably have exposure that they are not aware of, through pension plans, real estate holdings or other investments. Eventually, the asset class could grow to have an impact on all investors, Asche says.

“There is not going to be an individual out there who doesn’t have exposure to this asset class,” he says, “whether it’s a retail advisor or a highly sophisticated institutional client.”

This makes it important for financial advisors to be familiar enough with alternative investments to be able to communicate clearly to clients the risks and potential returns. Very often, the risks and returns are quite different from those of traditional investments.

“There are issues specific to our industry that have to be dealt with separately,” says Phil Schmitt, chairman of the Canadian division of the Alternative Investment Management Association in Toronto. He says demand for education and for designations, such as the CAIA, are growing along with the industry. “They’re growing in popularity and in relevance.”

Most university programs offer very little exposure to alternative investments. Although some master’s of business administration programs feature introductory material on hedge funds, private equity and other alternative areas, no comprehensive programs exist, Asche points out.

Furthermore, because many financial institutions lack the resources to establish thorough training programs, many employees who deal with complex alternative investment products do not receive any formal education.

This lack of training was a key contributing factor to some of the significant investor losses incurred in recent months, Asche says: “There was misinformation that was passed along by people who just simply hadn’t had proper training. It’s a risk to the institution, it’s obviously a risk to the investor and to the overall reputation of the investment world.”

Earning a CAIA designation is a similar process to earning the CFA designation. The program involves two exams that can be completed in a year or more, and roughly 300 hours of study time. Qualified candidates must also have at least four years of professional experience, or one year of professional experience and a bachelor’s degree.

Given the extensive studying involved, Schmitt warns that the program is best suited to advisors who are committing a key portion of their asset base to alternatives. “For just a general overview, it’s probably a little too intense,” he says.

Asche disagrees. He encourages investment professionals with any involvement in alternative investments to pursue education in the industry. He became involved in the association after working with financial advisors at some major U.S. financial institutions and seeing their lack of knowledge of investments they were recommending.

@page_break@“It was disappointing,” he says. “If you don’t know anything about it, you don’t have the internal resources, you don’t have external expertise, you should not be doing it.”

Professionals in the Canadian investment industry have displayed a particular commitment to educating themselves. Several hundred have earned the CAIA designation so far, representing a higher proportion than other countries given the relatively small size of Canada’s investment industry.

Gordon Bell, a portfolio manager with ScotiaMcLeod Inc. in Kelowna, B.C., says completing the CAIA program in 2006 has been extremely beneficial to his business. He works primarily with high net-worth clients and advocates the use of alternative strategies.

“I gained a better understanding of the different strategies out there … what strategies work and under what conditions,” he says.

Furthermore, learning how to conduct the appropriate due diligence on alternative investments has helped Bell avoid “some of the pitfalls,” he says. “Particularly with what is going on today.” IE