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The alternative investment industry is experiencing remarkable growth that is fundamentally transforming how investors approach portfolio construction. What was once exclusively accessible to institutions and ultra-high-net-worth investors is becoming increasingly available to individual investors, creating new opportunities for enhanced returns and sophisticated risk management.
Advisors working with individual investors may not have fully considered how alternative investments could enhance client portfolios. Here are some key takeaways to consider when discussing alternatives with your clients.
The Barriers Are Coming Down & Clients Can Now Participate
For years, clients have been excluded from private investments, private equity, and real estate strategies that required minimums of $500,000 to $5 million. These investments have consistently demonstrated their value as portfolio enhancers, but they simply weren't accessible to most individual investors.
The landscape has fundamentally shifted. Platforms like Fundrise, now serving more than 1.9 million users, are making institutional-quality strategies available to retail investors. According to PwC, alternative assets are projected to grow from $13.9 trillion in 2022 to $23.2 trillion by 2027, a compound annual growth rate exceeding 10%.
A 20% Allocation Can Significantly Improve Risk-Adjusted Returns
Traditional 60/40 stock-to-bond portfolios have been the standard for balanced, growth-oriented investing. However, this approach struggled in 2022, recording its worst performance since 2008, with losses exceeding 16%, according to Morningstar.
Research from Cambridge Associates shows that allocating up to 20% of a portfolio to alternative investments can improve Sharpe ratios by 20%–30% versus traditional asset-only portfolios. Adding alternatives doesn't necessarily mean taking on more risk. In fact, it often means taking on less. When alternatives, particularly real estate, are added to a traditional portfolio, a more efficient risk-return profile can be created.
Alternatives Provide True Diversification When Clients Need It Most
Alternatives behave differently than traditional assets. Real estate, for example, isn't directly correlated to stock market performance. U.S. private real estate has shown only a 0.14% correlation to U.S. equities over the past two decades, according to NCREIF data. While the S&P 500 fluctuates based on current events and market sentiment, alternative investments don't exhibit the same reactive patterns.
Consider alternatives as portfolio diversifiers. When traditional markets are volatile, alternatives often move independently, providing potential stability when it's needed most. Whether it's long-short portfolios, hedge fund strategies, or real estate investments, these assets may help smooth out portfolio volatility because they don't all move in lockstep with traditional markets.
There Are Alternatives for Every Risk Profile & Investment Goal
Another important factor that advisors can help clients understand is that alternative investments aren't all high-risk, speculative plays. Just like traditional stock investments range from conservative large-cap value to aggressive growth stocks, alternatives span a wide risk spectrum.
Private credit, the fastest-growing segment, is projected to reach $2.3 trillion in assets under management by 2027, according to Preqin. Real estate investments are backed by hard assets, making them potentially less speculative than many people assume. While cryptocurrency remains more niche, fewer than 10% of advisors currently recommend exposure, per Cerulli Associates. There are structured approaches across the alternatives spectrum that can match various risk tolerances and investment objectives.
This Is a Permanent Shift, Not a Trend
The alternative investment space represents a permanent and expanding component of the investment landscape. The numbers support this: Alternatives have grown from about 12% of global AUM in 2010 to a projected 23% by 2030. Over the next five to ten years, the industry will continue to grow, diversify, and become increasingly accessible to broader investor populations.
Traditional stock and bond portfolios alone may no longer be sufficient to achieve optimal investment outcomes. As more educational resources become available and comfort levels increase, alternatives are becoming a standard component of portfolio construction. The key is starting the education process now and implementing these strategies thoughtfully.
The Role of Advisors in This Evolving Landscape
As an advisor, consider making clients aware of these opportunities while ensuring proper due diligence. The democratization of alternative investments creates real opportunities for clients, but success requires thorough research and education from multiple sources to develop informed investment strategies aligned with individual objectives and risk parameters.
Conversations with clients about alternatives should focus on their specific goals, whether that's potentially enhancing returns, reducing risk, generating income, or achieving better diversification. A balanced allocation of up to 20% in alternatives may be worth considering, adjusted according to each client's individual risk tolerance and investment objectives.
The alternative investment space represents a permanent fixture in modern portfolio construction. For advisors seeking to deliver optimal client outcomes, alternatives have evolved from an optional consideration to a strategic component worth serious evaluation.
Bill O’Brien is chief client officer of PPR Capital Management.
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Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.
