The investment landscape is shifting, with many individual investors looking to diversify their portfolios with assets outside traditional stocks and bonds.
In less than five years, the global alternative investments market is expected to reach $24.5 trillion, compared to approximately $16.3 trillion at the end of 2023, according to the Future of Alternatives 2028 report by research firm Preqin.
As fund managers expand their product offerings and key changes are implemented, alternatives have become more accessible than ever to individual investors.
What are alternative investments?
Alternative investments refer to multiple types of nontraditional investments that expose investors to private opportunities rather than public markets, says Megan Gorman, director of Private and Packaged Solutions at RBC Wealth Management–U.S. The three main types of alternative investments are private credit, private equity and real assets, such as real estate and agriculture.
These investments have attracted institutional investors for decades because they have the potential to reduce volatility in a portfolio, provide enhanced returns, offer income, and aren’t tied as directly to stock market performance, Gorman explains.
Individuals who stick to traditional investing strategies are missing exposure to a huge swath of the economy, says Rebecca Harlowe, Alternative Investments product manager at RBC Wealth Management–U.S.
According to S&P Capital IQ, more than 85 percent of U.S. businesses with $100 million or more in revenue are privately owned—a massive market for investors.
“If you understand the risks, with the help of an advisor, alternative investment funds can be a meaningful asset class,” Harlowe explains. “They can offer exposure to assets that may be beneficial under a variety of market conditions.”
That means there is a lot of room for individuals to review their allocation to alternative investments and determine if there are unrealized opportunities that align with their financial goals.
Who should consider alternative investments?
While not for everyone, alternative investments can be a valuable tool for a variety of investors to help them achieve their goals, Gorman says.
“Many investors need income, and alternatives, such as private credit strategies, often offer higher yields than public markets,” she says. “High-income earners who want to build their wealth for their growing family may be attracted to private equity. And real estate funds may offer an income stream from tenants and long-term growth—plus it can be a hedge against inflation.”
Alternatives may also be a good option for young, affluent people with the income to qualify as an accredited investor but have yet to build up their savings, Harlowe says.
“They may want to start with alternative investment funds that have lower minimums and offer some liquidity, and then move into more opportunistic strategies that may offer less liquidity and have higher minimums over time,” she says. “They just need to make sure they understand the liquidity each investment offers and decide how much they can invest based on that. And like any investment, they should be prepared to retain exposure long term to reap the most benefits for their portfolio.”
A rise in accessibility
Until recently, alternative investments were primarily only accessible to institutional investors, Harlowe says.
“Sponsors raising private funds often found it easier to go to large institutional investors who could write a $5-million or $50-million check to a single fund,” she says. “Over the last five-to-10 years, however, these funds have begun to open up to individuals, realizing they were leaving money on the table if they didn’t expand their pool of investors.”
In opening their strategies to individual investors, fund sponsors have started to create a new universe of funds that have evolved beyond simply lowering minimums. These newer structures often allow investors to access markets typically reserved for illiquid funds, such as private equity or direct lending, but in vehicles that offer the potential for liquidity on a quarterly basis.
“These products are also built with the idea that not everyone has a tax professional on their payroll to file for tax extensions and decode the K-1 forms that typically accompany private investments,” Gorman says. “That has evolved, and now vehicles are available with 1099 forms rather than the K-1 form, which makes taxes much less complicated.”
Risks of alternative investments
While the value of alternative investment funds may fluctuate less than investments in public companies, illiquidity is the prime risk investors need to understand, Gorman notes.
“Alternatives are meant to be long-term investments, not something you plan to exit in one-to-three years,” she says. “You need to be comfortable with the idea of doing without the cash for as long as it’s invested.”
In addition, the lack of transparency adds to the complexity and risk.
“Information is not available to everyone because these are private companies—you can’t just go online to get all the statistics and insights you may want,” Harlowe says. “Alternative investments are not regulated as strictly as public companies either, so additional due diligence is required to understand the opportunity and risk before investing.”
“It’s important to work with an educated financial advisor before investing in alternative investments to make sure they are a good fit for your individual circumstances,” Gorman says. “With an informed approach, alternatives can be a valuable addition to a diversified portfolio.”