Alternative investments have steadily moved from the periphery to the mainstream of investment portfolios. Once primarily utilized by institutional investors and sophisticated individuals with substantial wealth, these investment vehicles—ranging from hedge funds to private credit to cryptocurrency—have increasingly found their way into the portfolios of wealthy individuals and are now expanding into the mass market.
The Growing Alternative Market
The momentum behind alternative investments is evident in the numbers. According to research firm Preqin, global alternative assets under management are projected to reach $29.2 trillion by 2029, representing a substantial 74% increase from $16.8 trillion at the end of 2023. This growth is reflected in advisor behavior as well—a recent survey conducted by alternatives-investing platform CAIS and consulting firm Mercer found that nine out of ten financial advisors now incorporate alternatives into client portfolios, with half allocating more than 10% of client portfolios to this category.
This trend has become particularly notable among advisors featured in Barron’s Top 1,200 ranking, which lists the top advisors across all 50 states and the District of Columbia. This comprehensive ranking serves not only as a resource for finding advisors but also as an indicator of industry trends.
The Case for Alternatives
The primary appeal of alternative investments lies in their potential for portfolio diversification and enhanced returns. Charlie Maxwell, co-chairman of Cresset and the top-ranked advisor in Arizona according to Barron’s, explains: “If we can get our client families to accept the illiquidity that comes with private investments, we can unlock investment themes that they haven’t been exposed to if they’ve been a typical retail investor with a 60/40 portfolio.”
This statement captures the essence of what alternatives offer—access to investment opportunities beyond the traditional stock and bond allocation (the classic “60/40” portfolio). However, financial advisors emphasize that alternatives aren’t universally appropriate, particularly for middle-class investors. Christopher Toomey of Morgan Stanley Private Wealth Management cautions that the increased supply and demand for alternatives doesn’t mean they’re suitable for all investors, nor does it mean that all alternative investment vehicles offer equal quality or opportunity.
Understanding Alternative Investments
At its core, an alternative investment is any asset class added to a conventional stock and bond portfolio that’s expected to potentially deliver higher returns while not correlating with foundational assets. Many alternatives consist of “private” investments—assets that aren’t publicly traded and largely operate outside regulatory oversight. These investments often involve complex strategies better suited for wealthy investors, which is why asset managers typically distribute them through financial advisors who can explain the complexities to clients.
While the concept of alternative investments might seem modern, many have existed for generations. Real estate has been an investment staple throughout history. Hedge funds and private equity gained prominence in the 1980s and remain significant components of the alternative landscape. Private credit expanded after the 2008 financial crisis when traditional banks reduced risky lending practices, and has grown dramatically since then. Some investors also consider art, collectibles, and fine wine as alternatives, while others have embraced cryptocurrency.
Historically, alternatives have been reserved for investors who can commit substantial portions of their wealth for extended periods. Hedge fund minimum investments typically range from $100,000 to several million dollars, with investors potentially unable to withdraw funds for a year or longer. The underlying assets are often illiquid (consider the lengthy process of real estate transactions), leading fund managers to restrict investors from withdrawing all their capital simultaneously.
The fee structure of alternative investments is another notable aspect. A private-credit fund might charge 1% to 2% of assets under management, with additional performance fees ranging from 10% to 20% of profits above certain thresholds.
The Alternative Investment Landscape
Private Credit
Private credit is currently experiencing significant growth. This market for non-traditional banking system lending was estimated at approximately $1.5 trillion at the beginning of last year, up from $1 trillion in 2020, and is projected to reach $2.6 trillion by 2029, according to Morgan Stanley.
Toomey notes high demand for private credit, particularly in today’s elevated interest rate environment. While traditional fixed income offers relatively tight spreads (meaning corporate bonds aren’t yielding much more than less risky Treasuries), private credit can deliver low double-digit returns—a stark contrast to traditional bonds, which currently show negative three-year returns.
New York-based Nucleus Advisors, which manages $3 billion in assets, has more than one-third allocated to alternatives, including its partners’ investments. Jordan Waxman, founder and managing partner, indicates that the firm currently holds “substantial amounts” of private credit in client portfolios but avoids large private-credit funds, preferring “managers who are a little smaller, nimbler, and focused on senior secured credits.” These managers typically employ low-to-moderate leverage and generate income in the 10% to 12% range.
Hedge Funds and Other Strategies
Waxman expresses preference for global macro hedge funds, which can deliver stock-like returns with low correlation to the stock market. Though many top performers are closed to new investments, Nucleus capitalizes on periodic openings. Waxman also favors royalty investments—prepaying for revenue streams from sources like music, mining, or pharmaceuticals.
Morgan Stanley’s Toomey identifies opportunities in funding infrastructure for artificial intelligence and in the private-investment secondary market, where many funds need liquidity to pay shareholders. “We’re hearing that this is a great time to be buying assets,” Toomey observes.
Cryptocurrency
Bitcoin and other cryptocurrencies have gradually gained acceptance among mainstream investors and financial advisors, though significant skepticism persists. The global cryptocurrency market, valued at approximately $3 trillion, is dominated by Bitcoin with over 50% market share. While cryptocurrency offers potential for substantial returns, it comes with extreme volatility.
Matthew Hougan, chief investment officer at Bitwise Asset Management in San Francisco, suggests that throughout crypto’s 15-year history, small allocations have improved portfolio risk-adjusted returns when held for at least three years and rebalanced appropriately. “It isn’t for every investor, but for many investors with a long time horizon, allocating 1% to 5% to crypto can make a lot of sense,” he states.
Nucleus has invested in the crypto space for about five years, focusing more on blockchain technology than cryptocurrency itself. Waxman notes, “Crypto as a category is very interesting from the venture capital point of view. There’s seed investing that’s also very interesting.”
Risk and Return Considerations
While terms like “hedge funds” and “private equity” may evoke images of substantial profits, Waxman emphasizes that alternative investments serve dual purposes in client portfolios: “We are a big believer that you can get excellent returns and lower your overall portfolio risk if you find really good alternatives.”
Identifying quality alternatives requires clear understanding of associated risks. Management with proven track records is essential. Different asset types carry different risk profiles—geopolitical events can impact commodities, regulatory changes can affect cryptocurrency, and interest rates can influence real estate investments.
Despite the potential benefits of alternatives, Matthew Somberg of Gottfried & Somberg Wealth Management in Glastonbury, Connecticut, suggests they aren’t necessary for everyone: “Most retail investors, if they’re trying to achieve mid- to high-single digit returns, will be able to accomplish their goals through a traditional 60/40 periodically rebalanced portfolio. And I don’t know that there’s a huge need for the person who has $1 million or $2 million in their investment portfolio to carve out a significant allocation to alternatives.”
Nevertheless, asset managers are increasingly targeting the mass market.
Democratization Through ETFs
Liquid alternative investments—mutual funds or exchange-traded funds (ETFs) providing exposure to alternative strategies—offer relatively inexpensive options with daily trading capabilities and low investment minimums. Several ETFs have recently been proposed to or approved by the Securities and Exchange Commission, designed to give retail investors access to private equity, private credit, and hedge fund-like strategies. Examples include the SPDR SSGA Apollo IG Public & Private Credit ETF (ticker: PRIV), launched in late February with a private-credit allocation up to 35%, and the Pacer PE/VC ETF (PEVC), launched in early February, which provides exposure to private equity and venture capital investments.
While these ETFs broaden access to previously exclusive markets, some financial advisors question whether they can deliver the benefits of traditional alternatives without the associated trade-offs—high fees, lockup periods, and withdrawal restrictions.
However, liquid alternatives can be appropriate for wealthy investors as well. Somberg utilizes them for easier diversification since they’re more readily tradable. “Rebalancing a portfolio is very important, and if you own something that isn’t liquid, it can make rebalancing the rest of the portfolio more complicated,” he explains.
Market Volatility and Alternatives
Sean Connor, president and CEO of global private wealth at Blue Owl Capital, a leading alternative-asset manager, observes that investor interest in alternatives tends to increase during market turbulence: “We have noticed that every time there’s a big selloff with high correlation and lots of volatility, we tend to see a pretty meaningful increase in interest in what we do.”
Connor suggests that if volatile markets materialize, as many investment professionals anticipate, and alternatives demonstrate portfolio value, these funds should attract additional investors. “It’s easier to prove your value” during such periods rather than “when the markets are just up and to the right,” he notes.
Guidance for Potential Investors
Experts emphasize that investors shouldn’t pursue alternatives simply because others are doing so. As with any investment, understanding whether and why alternatives should be included in your portfolio is essential, says Toomey: “I think a lot of times there is a sensationalism about investing in alternative asset classes, and the investors don’t really understand how it fits within their overall investment plan.”
Connor recommends that investors question their advisors about potential negative scenarios: “I think the first question you should ask about any investment is: What’s the worst that can happen? How low can it go?”
Anyone recommending alternatives should be able to clearly explain their specific benefits and risks, how they align with your financial goals and risk tolerance, and provide transparent reporting on performance and fees.
Financial advisors like Somberg tend to favor established managers operating larger funds: “I’m going to be more comfortable using a really well-known manager than some firm I’ve never heard of that is creating a private-credit fund. If I saw something out there from a smaller firm that was offering 12% or 13% or 14%, I would get a little nervous.”
Conclusion
Alternative investments are gaining popularity as investors recognize their potential for diversification and enhanced returns. However, prudent investment decisions require careful consideration rather than following trends. The suitability of specific alternatives depends on your individual circumstances and objectives. As with any investment, making informed, thoughtful choices remains paramount.
Acknowledgment: This article was written with the help of AI, which also assisted in research, drafting, editing, and formatting this current version.
