The Market’s Biggest Whales are Making Huge Changes: Total Portfolio Revolution | Steve Novakovic of CAIA

Episode Summary

Executive Summary: Steve Novakovich argues that institutional investing is shifting from strategic asset allocation (SAA) to the total portfolio approach (TPA), which delegates more authority to staff and emphasizes portfolio-level outcomes over asset-class silos. The discussion also covers private markets liquidity, secondaries, evergreen funds, private credit, hedge funds, and why investor education is becoming essential as alternatives expand into private wealth.

Main Topics: Shift from SAA to TPA (Priority: 5/5): The interview centers on the growing move away from board-driven strategic asset allocation toward a staff-led total portfolio approach, with CalPERS cited as a major signal that the model is gaining legitimacy. Governance and decision-making changes (Priority: 5/5): Under TPA, boards set objectives and risk/return goals, but investment staff gain authority over allocations and manager selection, replacing highly granular board approvals common under SAA. Benchmarking in a total portfolio world (Priority: 4/5): TPA changes how performance is evaluated: instead of multiple asset-class benchmarks, boards focus on portfolio-level outcomes such as a stock-bond mix or liability-driven target, while internal staff may still use detailed benchmarks. Private markets liquidity and secondaries (Priority: 5/5): The conversation explores how continuation funds, secondary sales, and secondary funds are becoming important liquidity tools for LPs, especially amid private equity distribution slowdowns. Private credit and private equity positioning (Priority: 4/5): Novakovich says private credit remains attractive but now requires more selectivity and manager quality scrutiny, while private equity distributions improved in 2025 but remain partially aided by continuation funds. Hedge fund relevance and the beta/alpha problem (Priority: 4/5): He argues hedge funds struggle when equity beta dominates market returns, making it hard to justify 2-and-20 fees unless managers produce real alpha and lower volatility. Investor education and democratization of alts (Priority: 5/5): Kaya’s role is framed as educating new retail/private wealth investors on alternative investments, portfolio construction, risk, performance measurement, and the limits of liquidity promises.

Key Arguments: TPA is a major institutional shift because it delegates allocation and investment decisions from boards to investment staff, reducing micromanagement and allowing faster, more opportunistic action. CalPERS matters not just because of size, but because its adoption may legitimize TPA for other large allocators that have historically been slow to change. TPA benchmarking should be portfolio-level and objective-driven, not a collection of asset-class and sub-strategy benchmarks reviewed by the board. Short-term tactical moves under TPA can be much more aggressive than SAA band-trading, including examples like taking fixed income exposure to zero when rates were near zero. For GPs, TPA changes the sales process from strategy-vs-strategy competition to objective-based conversations about what problem the LP is trying to solve. Large multi-strategy GPs may benefit more under TPA than niche single-product firms because they can offer multiple solutions to a single LP need. Private credit is still in demand, but LPs are becoming more discerning about manager experience through credit cycles and about whether managers were disciplined in deploying capital. Private equity liquidity remains constrained, but 2025 showed some improvement in distributions; however, continuation funds may distort liquidity statistics. Secondary markets are now a mainstream portfolio-management tool for LPs, offering vintage diversification, quicker deployment, and a way to rebalance portfolios. Hedge funds continue to face skepticism because market beta has driven much of public market returns, making it hard for managers to justify high fees unless they deliver true alpha. Investors need education because alternatives are structurally different from public markets: IRR, pacing, lockups, and liquidity assumptions are easier to misunderstand and misuse. Evergreen funds solve some access and pacing issues, but they are not truly liquid in stress scenarios; investors may misunderstand their redemption reality.

Data Points: Private equity distribution improvement: Uptick in 2025 - Novakovich said PitchBook data showed distributions improved relative to prior years, though not dramatically. Continuation funds share of liquidity events: About 20%-25% - He cited PitchBook figures suggesting a significant share of liquidity events came via continuation funds. Secondary discount on Harvard-like sales: Around 15% - Referenced as the headline discount on some endowment secondary sales, though he said the fair value depends on asset mix. Typical buyout secondary discount: 5%-10% - He said diversified buyout portfolios often clear around this range in today’s market. Private equity fund fee structure: 3 and 30 - Used as an example of venture capital compensation levels that can still produce strong net returns. Classic hedge fund fee structure: 2 and 20 - Cited as the standard arrangement LPs must justify when hedge funds are mostly capturing beta. Sample TPA benchmark: 70/30 stocks and bonds - Illustrated how some TPA allocators benchmark at the total-portfolio level rather than by asset class. Retail/wealth education offering: 7-hour private equity micro-credential - One example of Kaya’s formal education products for newer investors. Portfolio implementation course: 9 hours - New Kaya micro-credential focused on how to allocate and implement alternatives in portfolios. Kaya charter program: 200+ hours - Referenced as the most intensive designation for professionals seeking deeper formal training.

Pivotal Quotes: "you make a change, and the pain of changing is no longer as great as the pain of staying the same." — Steve Novakovich: Explaining why CalPERS and other institutions may finally be willing to move away from legacy allocation models. "it is very much kind of a best ideas mentality" — Steve Novakovich: Describing how TPA changes LP decision-making from asset-class silos to a portfolio-wide opportunity set. "I don't care. That's not what I'm getting." — Steve Novakovich: On why LPs often dismiss hedge fund managers’ gross return discussions in favor of net returns.

Implications: TPA may accelerate institutional flexibility, while secondaries and education become more important as private markets broaden. Managers will need to sell solutions, not products; investors will need stronger literacy to avoid liquidity and benchmarking mistakes.