The alternative investments landscape presents a compelling paradox in 2025: while assets under management continue to reach unprecedented levels, performance across virtually every major alternative asset class has disappointed investors seeking to diversify beyond traditional stocks and bonds. This disconnect between growing capital allocation and underwhelming returns has created a complex environment that demands careful analysis for institutional and individual investors alike.
Alternative investments, broadly defined as financial assets that fall outside conventional investment categories such as publicly traded stocks, bonds, and cash equivalents, have experienced remarkable growth in recent years. According to comprehensive research from J.P. Morgan, total assets under management in alternative investments have surpassed an impressive $33 trillion globally, reflecting the continued appetite among investors for portfolio diversification and access to potentially uncorrelated return streams.
This substantial asset base encompasses a diverse universe of investment strategies and structures, including private equity funds, private real estate investments, private credit facilities, hedge fund strategies, and emerging digital assets. Each of these categories has attracted significant institutional and high-net-worth individual investor interest, driven by the promise of enhanced returns, reduced correlation with public markets, and access to investment opportunities unavailable through traditional channels.
The Performance Paradox: Growth Amid Underperformance
Despite the impressive growth in assets under management, alternative investments have faced a sobering reality check in terms of performance delivery. For the third consecutive year, the broad universe of alternative investments has underperformed their publicly traded equivalents, raising important questions about valuation, fee structures, and the fundamental value proposition of these complex investment vehicles.
Nikolaos Panigirtzoglou, who covers Global Markets Strategy at J.P. Morgan, has documented this concerning trend with precision. “The share of alternatives in the total asset universe drifted lower to 15.2% in the current quarter, down from 15.4% at the end of 2024 and a peak of 16.2% at the end of 2022,” he noted. This declining share relative to total global assets suggests that while alternative investments continue to grow in absolute terms, they are losing ground relative to the broader investment universe.
Perhaps most troubling for the alternative investment industry has been the significant weakness in new capital formation. Fundraising activity, a critical indicator of future industry health and investor confidence, is tracking an annualized pace of below $1 trillion—representing the weakest fundraising environment since 2016. This dramatic slowdown in capital raising activity reflects both investor disappointment with recent performance and increased scrutiny of alternative investment strategies that have failed to deliver on their historical promises.
The fundraising challenges extend beyond simple performance concerns to encompass broader questions about market saturation, fee compression, and the increasing difficulty of generating alpha in an environment where information asymmetries have diminished and competition for attractive investment opportunities has intensified dramatically.
Private Equity: Navigating Policy Uncertainty and Market Headwinds
The underperformance of alternative investments has been largely driven by significant weakness in private equity, traditionally one of the most attractive and successful alternative asset classes. The sector has experienced a dramatic shift in sentiment as initial optimism about favorable policy developments has given way to concerns about more disruptive economic policies and their potential impact on portfolio companies.
Mika Inkinen, who covers Global Markets Strategy at J.P. Morgan, has observed this evolution with concern. “The previous sense of optimism that private equity would be supported by sustained growth, declining interest rates, ongoing U.S. exceptionalism and the Trump administration’s deregulatory agenda has faded as risks of more disruptive policies have materialized,” he explained.
The performance data tells a stark story of relative underperformance. While private equity posted returns of 7.3% for 2024—representing a modest improvement from the challenging environment of 2023—these gains pale in comparison to the robust performance of public equity markets. Large-cap companies in the S&P 500 delivered returns of 25%, while small- to mid-cap companies in the Russell 2500 Index generated returns of 12%, both significantly outpacing private equity performance.
The venture capital segment, often considered the most dynamic component of the private equity universe, faced even greater challenges. Overall returns for 2024 tracked a modest 3.6%, reflecting the continued headwinds facing early-stage technology companies and growth-oriented businesses. While this performance represented a notable improvement from the negative returns of -3% experienced in 2023, it remained far below the historical expectations that have attracted significant institutional capital to the asset class.
Ongoing trade policy uncertainty has emerged as a particularly significant concern for private equity investors and managers. The unpredictable nature of tariff policies and international trade relationships makes it extremely challenging for businesses to develop long-term strategic plans, invest in capacity expansion, or make the operational improvements that private equity firms typically rely upon to generate returns.
Inkinen has identified the specific mechanisms through which trade uncertainty impacts private equity performance. “This is in part because tariff uncertainty makes it challenging for businesses to plan ahead, but also because prolonged tariffs could, as the Fed has acknowledged, support both inflation and unemployment, potentially limiting how far it can cut rates,” he observed.
For private equity funds with newer vintages—referring to funds that have recently begun investing their committed capital—elevated uncertainty could potentially delay investment decisions as managers wait for greater clarity about the economic and policy environment. For older vintage funds with portfolio companies that were acquired using higher levels of leverage, policy uncertainty could reduce cash flows by prolonging the higher interest rate environment that increases financing costs for leveraged businesses.
Despite these near-term challenges, there are structural factors that could support improved performance over the longer term. Companies across multiple sectors are being forced to adjust their business models in response to ongoing emphasis on re-shoring supply chains, enhancing energy security, and addressing national security concerns. These structural shifts create opportunities for private equity firms that can help portfolio companies navigate complex transitions and capture value from changing market dynamics.
Private Credit: Competing in a Challenging Environment
Private credit markets, where lending is provided by institutions other than traditional banks, have similarly struggled to justify their premium pricing relative to public market alternatives. This specialized lending sector has experienced marginal underperformance compared to publicly traded credit instruments, raising questions about the value proposition for investors willing to accept liquidity constraints in exchange for potentially enhanced returns.
According to data from Preqin, U.S. private credit funds returned 8.3% in 2024, falling short of the 8.7% returns generated by high-yield bonds and the 9.3% returns from leveraged loans. While these performance gaps may appear modest, they become more significant when considered alongside the liquidity constraints, higher fees, and longer commitment periods typically associated with private credit investments.
Daniel Lamy, head of European Credit Strategy Research at J.P. Morgan, has analyzed the complex factors influencing borrower decisions between private credit and syndicated markets. “A host of factors may influence an issuer’s decision to access either private credit or syndicated leveraged finance markets. Reasons an issuer may opt for private versus syndicated debt include certainty and speed of execution, the benefits accompanying a smaller group of lenders and generally more flexibility in structures. And then there’s the relative cost of financing, which has varied considerably over time,” he explained.
The competitive dynamics between private and public credit markets have evolved significantly, with pricing spreads between the two markets narrowing considerably. While this convergence makes private markets more favorable for borrowers seeking financing, it reduces the potential returns available to private credit investors who must now compete more directly with liquid alternatives.
Lamy has noted important developments in market structure that affect private credit attractiveness. “Although this makes private markets more favorable for borrowers, the secondary market for BSLs recovered sharply in May,” he observed. Additionally, increased competition between private and syndicated markets has fueled a surge in cross-market financings, where borrowers can access both private and public funding sources simultaneously.
On the capital raising front, global private credit fundraising demonstrated resilience in the first quarter of 2025, jumping to $59 billion from $37 billion in the fourth quarter of 2024. Interestingly, this gain came entirely from European investors, which raised a record $31 billion, while allocations to funds focused on North America moderated for the second consecutive quarter to $27 billion.
This geographic divergence in fundraising activity reflects different regional approaches to alternative credit strategies and varying investor sentiment about market opportunities. European investors may be responding to different regulatory environments, currency considerations, or regional economic conditions that make private credit more attractive relative to local alternatives.
Hedge Fund Strategies: Navigating Volatile Markets
Hedge funds, traditionally valued for their ability to generate returns independent of broader market direction, have faced significant challenges in 2025. The sector has disappointed investors year-to-date, delivering modest returns of just 0.17% after fees—a performance level that fails to justify the typically high fee structures associated with these sophisticated investment strategies.
This sluggish performance has been primarily attributed to difficulties in specific strategy areas. Equity sector funds posted negative returns of -4%, while managed futures strategies recorded disappointing returns of -8.8%. These poor results from traditionally strong-performing strategy categories highlight the challenging market environment that hedge fund managers have faced in navigating unpredictable market swings and changing economic conditions.
In comparison, global macro and credit-focused hedge fund strategies fared relatively better, delivering modest but positive returns of 2.7% and 1.6% respectively. These strategy categories may have benefited from their ability to capitalize on interest rate volatility, currency movements, and credit spread dynamics that have characterized financial markets throughout the period.
Alpha generation—the excess returns that hedge funds generate compared to their benchmark indices—has also declined significantly. Panigirtzoglou has documented this concerning trend: “Alpha generation for hedge funds had improved markedly in 2024, as subdued bond market performance made it easier for hedge funds to beat a volatility-matched bond/equity benchmark. 2025 seems to be the opposite, as the alpha generated across hedge fund categories appears to be negative so far this year through the end of April.”
Despite these disappointing near-term results, J.P. Morgan Research maintains a constructive outlook for the hedge fund sector based on structural factors that should support improved performance over time. The research team believes that hedge funds continue to benefit from a structurally expanded opportunity set created by rapidly evolving macroeconomic conditions, policy changes, political developments, and market structure evolution.
Panigirtzoglou has identified several factors supporting his continued optimism about hedge fund prospects. “Despite a negative alpha year-to-date, we continue to see hedge funds benefiting from a structurally expanded opportunity set due to rapidly evolving macroeconomic, policy, political and market changes and more opportunities in event-driven and credit spaces. In addition, hedge funds offer greater liquidity relative to other private asset classes,” he noted.
Real Estate: Resilience Amid Trade Concerns
The commercial real estate sector presents a more optimistic outlook within the alternative investment universe, experiencing modest capital growth and showing signs of market stabilization after a challenging period. Reported sales volumes, which had previously hovered near multi-year lows, improved markedly in the United States during the fourth quarter of 2024, suggesting renewed investor confidence and improved market liquidity.
While transaction activity slowed somewhat in the first quarter of 2025 due to tariff uncertainty and broader economic policy concerns, this deceleration is expected to be temporary. Market participants anticipate that sales volumes will gradually normalize toward pre-pandemic levels as uncertainty resolves and economic conditions stabilize.
Panigirtzoglou has provided a nuanced analysis of how trade policy changes might affect different real estate sectors. Regarding concerns about industrial property, he offers a contrarian perspective: “In terms of the impact of tariffs on commercial real estate, a common argument is that industrial property could suffer as demand for warehouses could slow from a potential retrenchment in goods trade. We disagree with this view and believe that the reorganization of global trade, supply chains and logistics induced by higher tariffs could eventually create more, rather than less, demand for warehouses.”
This analysis suggests that while trade disruption might initially create uncertainty, the longer-term structural changes required to reorganize global supply chains could actually increase demand for industrial real estate as companies seek to establish more resilient and geographically diversified logistics networks.
The office and retail sectors face different challenges and may suffer indirectly if tariff policies cause significant economic growth slowdowns that reduce demand for commercial space. However, the impact on these sectors would likely depend more on overall economic performance than on specific trade policies.
Residential property emerges as a preferred sector within the real estate universe, with Panigirtzoglou noting its relative immunity to trade policy concerns. “We view residential property, which is one of our preferred sectors, as being relatively immune to tariffs unless a deep recession takes place in the U.S., causing a big increase in the unemployment rate,” he explained. “However, a deep U.S. recession scenario is unlikely in our opinion.”
Looking Forward: Challenges and Opportunities
The alternative investment landscape in 2025 presents both significant challenges and emerging opportunities for institutional and individual investors. While recent performance has been disappointing across multiple asset classes, the structural factors that originally attracted capital to alternative investments—including portfolio diversification, access to unique return streams, and reduced correlation with public markets—remain relevant considerations for long-term investment strategy.
Panigirtzoglou has provided a sobering but realistic outlook for the sector: “Our expectation is that private equity and private credit will lag their public market counterparts, and that real estate will deliver only modest gains.” This forecast suggests that investors should temper expectations while continuing to evaluate the role that alternative investments might play in well-diversified portfolios.
The key to successful alternative investment allocation in this environment may lie in more selective approach to manager selection, greater attention to fee structures and alignment of interests, and a more nuanced understanding of how different alternative strategies perform across various market cycles and economic conditions. As the industry matures and competition intensifies, the dispersion of returns between top-performing and average managers is likely to increase, making due diligence and manager selection more critical than ever for achieving satisfactory investment outcomes.
Acknowledgment: This article was written with the help of AI, which also assisted in research, drafting, editing, and formatting this current version.
