Alternative Investments: The Next Big Opportunity for Investors

“The next big wave of investing is here, and alternatives are at its forefront.”

The investment landscape has been traditionally dominated by stocks and bonds, assets that everyday investors have relied on for building wealth. However, recent shifts in the market have piqued interest in a broader category of assets known as alternative investments, or "alts." These assets—which include private equity, hedge funds, real estate, and venture capital—were once exclusive to institutional investors, but they’re increasingly accessible to accredited investors and qualified clients and purchasers as defined by the Securites Exchange Commission. Now, with the potential for quarterly liquidity and lower entry points, alternative investments are positioning themselves as the next big thing for investors looking to diversify their portfolios.

Why Alternative Investments are Trending for Investors

Historically, alternatives have been associated with ultra-wealthy or institutional investors due to high barriers to entry, complex structures, and liquidity restrictions. Yet, today, factors such as market volatility, low yields on traditional assets, and the rise of fintech platforms are driving a democratization of access to alts. According to a report from BlackRock, alternatives are anticipated to make up 18% of the global asset mix by 2025, up from just 12% in 2020. This trend represents a compelling opportunity for investors to access returns typically uncorrelated with the stock market’s ebbs and flows.

1. Low Correlation with Traditional Markets

Alts provide investors with a buffer against market volatility, as their returns tend not to follow traditional stock or bond market trends. This low correlation can protect a portfolio during times of economic uncertainty, especially when public markets are underperforming. As McKinsey & Company points out, this resilience has led to alternative investments becoming a mainstay in many institutional portfolios, with a performance that often outpaces stocks in periods of high inflation and market disruption.

2. Quarterly Liquidity: Access Without Sacrificing Flexibility

One of the most exciting developments in the alt investment space is the introduction of quarterly liquidity for certain funds. Traditionally, alts are illiquid, requiring investors to lock in their money for several years. However, many alts now offer quarterly liquidity after an initial holding period, often about one year. This feature strikes a balance for investors who want access to private markets but may still need a level of flexibility. According to Preqin, an investment data firm, this liquidity evolution has significantly boosted interest in alts, as it aligns with investors' growing need for periodic access to their funds.

Alt Hedge Funds: Entry Point and Growth Potential

Alternative hedge funds are becoming one of the more accessible and attractive options within alts, especially as new regulations and structures open up these funds to a broader range of investors. Hedge funds use diverse strategies—like long/short equity, global macro, and event-driven investing—that are not bound to stock market indices. This active management style can help mitigate risks and enhance returns, making them particularly valuable during volatile market phases.

As Goldman Sachs highlights, hedge funds are expected to see continued growth due to their performance potential and flexibility. Many alternative hedge funds now offer entry points starting at $100,000, which, while still high, is more manageable for investors compared to the million-dollar minimums seen a decade ago.

3. Accessible Entry Points with Managed Risks

Previously, the high minimums and opaque structures of alternative hedge funds made them daunting. Today, many funds now offer transparency, educational resources, and lower entry requirements, democratizing access for individual investors. With managed risk and active strategies, these funds can serve as a powerful complement to a traditional portfolio, reducing reliance on stock market performance.

Building an Effective Portfolio: Start Small but Strategically

Financial experts suggest that investors who are new to alternatives should consider reallocating a modest percentage of their portfolio—often around 10% to 25%—to alts. This approach allows investors to test the waters without overexposing their finances. Consider this: if you currently have a $400,000 stock portfolio, a 25% reallocation would amount to $100,000, a manageable sum that meets the minimum for many alternative hedge funds.

Morningstar notes that a well-diversified portfolio including alternative investments has historically shown lower volatility and better risk-adjusted returns over time. This approach aligns with long-term growth strategies while maintaining resilience against economic downturns, inflationary pressures, and other market disruptions.

Getting Started: The Practical Steps

1. Assess Your Current Portfolio: Start by reviewing your current holdings to determine if you have a significant concentration in stocks or bonds. Diversification is key, and adding alts can help stabilize returns.

2. Identify Reputable Platforms and Funds: Many financial firms now offer accessible alternative funds with reasonable minimum investments. It’s essential to research fund strategies, fees, and historical performance.

3. Consult a Financial Advisor: Especially if you’re new to alternatives, a financial advisor can guide you through evaluating options, understanding fee structures, and selecting the right funds to meet your investment goals.

4. Prepare for the Initial Hold Period: While quarterly liquidity is an option after the first year, investors should plan to keep their funds in place for at least the initial holding period to realize full potential gains.

Final Thoughts: Diversifying for the Future

Alternative investments are no longer an exclusive club for the ultra-wealthy. With easier access, lower minimums, and quarterly liquidity options, they offer a viable path to portfolio diversification and risk management. As you consider rebalancing your investments, explore alts as a practical option for achieving a more resilient and diversified portfolio. By allocating a portion of your stock-heavy holdings—up to 25%—into alternatives, you can potentially unlock returns that thrive regardless of broader market conditions. The next big wave of investing is here, and alternatives are at its forefront.

For those looking to reduce their reliance on traditional assets and expand their portfolio’s horizons, alternative investments provide a flexible, high-potential avenue. With a solid strategy and a calculated reallocation, your portfolio can be better prepared to weather the ups and downs of the market, making this the ideal time to explore the world of alts.

Sources for the article:

Source: BlackRock. 2023 Global Alternatives Outlook. Retrieved from BlackRock’s official website.

Source: McKinsey & Company. The Rise and Rise of Private Markets: McKinsey Global Private Markets Review 2023. Retrieved from McKinsey’s official website.

Source: Preqin. Preqin Quarterly Update: Alternatives in 2023. Retrieved from Preqin’s website.

Source: Goldman Sachs. 2023 Hedge Fund Industry Insights. Retrieved from Goldman Sachs website.

Source: Morningstar. The Role of Alternative Investments in Portfolio Diversification. Retrieved from Morningstar’s website.

Source: SEC. Investor Bulletin: Accredited Investors and Investment Advisers Act Rules. Retrieved from SEC’s official website.