The Evolution of Alternative Investments: Opening Institutional Strategies to Individual Investors

The landscape of alternative investments is undergoing a dramatic transformation. What was once the exclusive domain of pension funds and insurance companies is rapidly becoming accessible to individual investors. This democratization of private markets represents one of the most significant shifts in wealth management in recent decades, offering everyday investors access to asset classes that have historically delivered strong returns with low correlation to public markets.

A recent conversation on JPMorgan Asset Management’s Alternative Realities podcast explored this evolution in depth. The discussion covered everything from navigating current market volatility to the future of alternatives in retirement accounts, providing insights from nearly three decades of experience in the asset management industry and offering a unique perspective on how the alternative investment industry has grown and where it’s heading.

Witnessing Tremendous Growth Over Three Decades

The explosive growth of JPMorgan’s asset management business over the past generation illustrates the broader expansion of the alternatives industry. In 1996, JPMorgan Asset Management oversaw approximately $350 billion in assets. Today, that figure has grown tenfold to over $3.5 trillion. This growth has been accompanied by leadership across various global markets, including a three-year period managing the asset management business across eight countries in Asia Pacific, demonstrating the truly global nature of alternative investment expansion.

The evolution of JPMorgan’s alternatives business reflects broader industry trends. The firm started with core U.S. real estate, primarily serving U.S. pension funds. Over the subsequent two to three decades, this single-strategy focus expanded into a globally diversified alternatives platform. The real estate foundation grew to encompass infrastructure and transportation. The firm developed a special situations platform and more recently expanded into private capital. In 2021, JPMorgan acquired Campbell Global, a forestry manager, further diversifying its real assets capabilities.

This diversification across equity, debt, public, and private markets, along with different sectors within private markets, provides JPMorgan with a comprehensive perspective. The firm can engage with investors, portfolio companies, and clients across multiple dimensions, addressing various objectives whether clients seek diversification, returns, risk management, opportunistic positioning, or defensive strategies.

Navigating Unprecedented Market Volatility

The discussion took place at the end of a particularly turbulent week in public markets, providing timely context for examining the role of alternatives. Markets have experienced historic volatility as investors process the potential impact of tariffs on economic growth. This environment represents a departure from the extended bull run in risk assets that preceded it, creating what industry experts describe as a “combination of certainty and uncertainty” around expectations for tariffs and economic growth.

This volatility underscores a critical challenge for investors: bonds haven’t consistently provided the negative correlation to equities that traditionally made them effective portfolio defenders. Since 2021, this relationship has been inconsistent, leaving investors searching for additional sources of diversification and protection. This is where alternatives enter the picture, offering characteristics that can complement traditional stock and bond portfolios.

Infrastructure investments, for instance, provide inflation protection along with low correlation and low volatility relative to public equities. These aren’t new concepts for institutional investors, who have long recognized these benefits. However, individual investors are increasingly seeking access to these same characteristics, driving demand for alternative investment options outside institutional channels.

The Mechanics of Increasing Accessibility

Several factors are making alternatives more accessible to individual investors. New vehicle structures allow strategies to be offered with lower minimum investments and greater liquidity than traditional private funds. These include business development companies, interval funds, and tender offer funds designed for different investor qualification levels and liquidity preferences.

The quality of offerings has also improved significantly. While retail-oriented alternatives existed twenty years ago, today’s products represent much more institutional-quality strategies adapted for the wealth segment. This represents a meaningful upgrade in the sophistication and rigor of alternative investments available to individual investors.

Fees have generally declined over time as managers achieve economies of scale and pass efficiencies on to investors. However, manager selection remains critically important in private markets. The performance spread between top-quartile and bottom-quartile managers tends to be wider in private markets than in public markets, making due diligence essential before committing capital.

Investors must understand that some alternative vehicles designed for individual investors offer more liquidity than traditional private funds. This additional liquidity comes at a cost—investors give up some return in exchange for that liquidity premium. Understanding this trade-off, along with fee structures and strategy objectives, is crucial for making informed allocation decisions.

Institutional investors have valuable lessons to share from their decades of experience with alternative investments. The primary lesson centers on risk management and understanding how asset managers approach their strategies. The term “alternatives” encompasses many different things: real estate, infrastructure, hedge funds, private equity, credit, and more. Each requires careful evaluation.

Risk management becomes particularly important in less liquid investments because everything’s fine until it’s not. Investors benefit from working with managers who have navigated difficult periods, managed through financial crises, and demonstrated how they’ve handled liquidity and investor relations during market stress. These historical track records provide valuable insights into how managers will perform during future challenging periods.

Strategic Opportunities in Today’s Market

JPMorgan publishes long-term capital market assumptions that provide forward-looking return, risk, and correlation projections for virtually every asset class globally. These business-cycle-neutral assumptions help guide strategic allocation decisions. For the current environment, some of the most compelling return opportunities appear in real estate, both core and opportunistic strategies.

Several factors support this view. First, real estate across many segments has declined 20% to 50%, creating a reset in valuations. Second, secular trends continue driving demand in specific real estate sectors. The U.S. faces a persistent housing shortage. Industrial and outdoor storage properties remain in demand driven by e-commerce growth—the ubiquitous presence of delivery vehicles requires warehouses, distribution centers, and maintenance facilities.

Office properties present a more nuanced opportunity. This segment has experienced significant price declines, but economic conditions that may drive more workers back to offices five days per week could create value opportunities. Current market conditions could allow investors to achieve core-plus or opportunistic returns from core real estate assets. Historical precedents from the global financial crisis and the savings and loan crisis show that periods of historic real estate price dislocations were followed by exceptional returns over the subsequent 10 to 15 years. The current environment may represent another such inflection point.

Infrastructure represents another compelling theme, offering stable, predictable, long-term return drivers with embedded inflation protection. Increased power demand—driven not just by artificial intelligence but by the electrification of virtually everything—creates sustained investment opportunities. Countries worldwide recognize the necessity of energy security, a theme that gained prominence following the war in Ukraine and remains relevant today. The energy transition isn’t a political issue but a practical necessity to meet growing energy demand, requiring new forms of power generation and distribution infrastructure.

These infrastructure themes remain largely uncorrelated with short-term market volatility driven by trade policy concerns. Domestic power consumption and utility needs continue regardless of tariff regimes or geopolitical tensions, making infrastructure investments particularly attractive during uncertain periods.

The Private Equity and Credit Opportunity

On the return-seeking side of portfolios, private equity continues offering compelling opportunities. Many of the world’s largest and most innovative companies were private at some point, and private equity has historically provided access to high-growth companies before they reach public markets.

The mergers and acquisitions market has faced challenges in recent years. Deal activity has been suppressed, leading some in the industry to joke that the M&A market has been “six months away from recovery for three years.” This environment has been difficult for private equity because investors realize returns when portfolio companies complete transactions, sell, or generate what the industry calls “realizations.”

However, this challenging environment has created opportunity. Valuations in private equity have become more attractive than in many public market segments. Looking at 2024 data, approximately 60% of later-stage funding rounds—Series D or Series E rounds where companies were raising their fourth or fifth round of capital—were “down rounds,” meaning companies raised money at lower valuations than previous rounds. In contrast, only 10% to 20% of early-stage rounds were down rounds.

This represents the widest spread between early-stage and later-stage valuations in a decade, creating opportunities to invest in high-growth companies at more reasonable prices than comparable growth opportunities in public markets. Fresh capital deployed into private equity, venture growth, technology, and life sciences could benefit from these more favorable entry points. For investors with dry powder ready to deploy, this environment offers compelling entry points across multiple sectors.

The credit side presents equally interesting opportunities. When companies can’t complete traditional deals and M&A activity remains suppressed, these businesses still need capital and must borrow in a high-rate environment. With the 10-year Treasury fluctuating around 4.5%, stressed credit opportunities—not quite distressed but lending to companies facing challenges—offer significant return potential. When sponsors can’t execute traditional deals, they launch continuation funds to manage assets through normal harvest periods, creating lending opportunities in special situations within private credit markets.

High interest rates have created challenges for companies that need to borrow money, but this difficulty for borrowers creates opportunities for lenders willing to provide capital in stressed situations. The special situations segment of private credit stands to benefit significantly from this dynamic.

Risk Management in Illiquid Assets

Risk management deserves special emphasis when discussing private markets. While risk management matters in all investing, it’s particularly crucial in private markets due to asset illiquidity. These tend to be longer-term strategies with lockup periods that don’t offer daily or sometimes even annual liquidity.

Understanding the risks before making an investment and clearly defining the role an alternative allocation will play in a portfolio is essential. Investors need to consider whether an allocation is return-seeking or diversifying, and how it will interact with the public market portion of their portfolio. Traditional asset allocation thinking applies: What role should this allocation play? Is it for returns, diversification, or both? How does it interact with public market holdings?

Manager selection becomes even more critical given the illiquid nature of these investments. Investors form long-term relationships with private market managers because of liquidity constraints—they’re connected with a fund and manager for potentially much longer than with an ETF or mutual fund that can be sold daily. This makes the initial selection decision even more consequential.

For individual investors, understanding personal liquidity tolerance is important. While giving up liquidity isn’t intuitively comfortable, most individuals can likely sacrifice more liquidity than they typically do. Institutions with longer time horizons are often more comfortable with illiquidity, but individuals planning for retirement decades away have similar long-term horizons. The key is understanding personal boundaries around liquidity and then leveraging illiquid investments to potentially achieve better returns and portfolio diversification.

Investors should properly size their alternative allocations based on their liquidity needs and comfort level. There’s significant value to be captured by accepting illiquidity, but only if investors can truly afford to lock up capital for extended periods without needing access for emergencies or other financial requirements.

The Future: Alternatives in Retirement Plans

JPMorgan has been an innovator in bringing alternatives to defined contribution plans. The firm has included direct real estate in its Smart Retirement target-date funds for nearly two decades, demonstrating a long-standing belief in alternatives within retirement accounts. While alternatives have been fixtures in pension plans for many years, regulatory developments are underway to make it easier for plan sponsors to offer private market options in 401(k) and similar plans.

However, implementing alternatives in retirement plans must be done responsibly. Most individual investors don’t have the expertise to determine appropriate alternative allocations or decide on the optimal mix between equity, credit, and real assets. Professional portfolio construction becomes essential when making alternatives available in retirement contexts. The experience of firms that have successfully incorporated real estate and other alternatives into target-date series demonstrates the benefits of thoughtfully integrated alternative allocations over time.

For investors thinking about their retirement accounts, there’s an important realization: many people don’t touch their 401(k) for twenty or thirty years. This long time horizon means there’s inherent liquidity available to sacrifice in exchange for potentially higher returns. Retirement accounts represent ideal vehicles for alternative investments given their long-term nature and tax-advantaged status.

Making alternatives more widely available in retirement plans should focus on doing so professionally. This means constructing portfolios that appropriately blend alternatives with traditional assets in ways that individual investors can understand and that provide demonstrable benefits over time. The goal isn’t simply to add alternatives for the sake of diversification, but to thoughtfully integrate them in ways that enhance long-term outcomes.

Looking Ahead: Compelling Themes and Opportunities

Several investment themes stand out as particularly compelling in the current environment. Real estate and infrastructure offer attractive risk-adjusted return potential with valuable diversification characteristics. Both sectors provide inflation protection and low correlation to traditional stock and bond portfolios, making them effective portfolio defenders during volatile periods.

Private equity presents opportunities to access high-growth companies at more reasonable valuations than recent years, particularly as the spread between early-stage and later-stage valuations has widened to decade-high levels. For investors with patient capital and appropriate risk tolerance, private equity across venture growth, technology, and life sciences offers compelling return potential.

Private credit, particularly in special situations and stressed lending, benefits from the current environment where companies need capital but face constrained access to traditional financing. This creates opportunities for investors willing to provide capital at attractive yields.

The democratization of alternatives represents a significant opportunity for individual investors to access institutional-quality strategies that can enhance portfolio diversification and potentially improve long-term returns. As the industry continues evolving with better structures, lower minimums, and improved liquidity options, more investors will gain access to asset classes that were once available only to the largest institutional investors.

However, accessing these opportunities requires careful consideration of risk management, manager selection, liquidity constraints, and how alternative allocations fit within overall portfolio objectives. Investors should approach alternatives with the same diligence and long-term perspective that has served institutional investors well for decades. With proper implementation and realistic expectations about liquidity and time horizons, alternatives can play a valuable role in helping individual investors achieve their financial goals while navigating an increasingly complex and volatile market environment.