We’re using cookies, but you can turn them off in Privacy Settings. Otherwise, you are agreeing to our use of cookies. Learn more in our Privacy Policy . Privacy Settings
Refresher Reading
Introduction to Alternative Investments
Privacy Settings
Functional cookies , which are necessary for basic site functionality like keeping you logged in, are always enabled .
Allow analytics tracking. Analytics help us understand how the site is used, and which pages are the most popular. Read the Privacy Policy to learn how this information is used.
2023 Curriculum CFA Program Level I Alternative Investments
Available to members
Introduction
In this section, we explain what alternative investments are and why assets under management in alternative investments have grown in recent decades. We also explain how alternative investments differ from traditional investments, and we examine their perceived investment merit. We conclude this section with a brief overview of the various categories of alternative investments; these categories will be explored further in later sections.
“Alternative investments” is a label for a disparate group of investments that are distinguished from long-only, publicly traded investments in stocks, bonds, and cash (often referred to as traditional investments). The terms “traditional” and “alternative” should not imply that alternatives are necessarily uncommon or that they are relatively recent additions to the investment universe. Alternative investments include such assets as real estate and commodities, which are arguably two of the oldest types of investments.
Alternative investments also include non-traditional approaches to investing within special vehicles, such as private equity funds and hedge funds. These funds may give the manager flexibility to use derivatives and leverage, to make investments in illiquid assets, and to take short positions. The assets in which these vehicles invest can include traditional assets (stocks, bonds, and cash) as well as less traditional assets. Management of alternative investments is typically active. Alternative investments often have many of the following characteristics:
- Narrow specialization of the investment managers
- Relatively low correlation of returns with those of traditional investments
- Less regulation and less transparency than traditional investments
- Limited historical risk and return data
- Unique legal and tax considerations
- Higher fees, often including performance or incentive fees
- Concentrated portfolios
- Restrictions on redemptions (i.e., “lockups” and “gates”)
Learning Outcomes
The member should be able to:
- describe types and categories of alternative investments;
- describe characteristics of direct investment, co-investment, and fund investment methods for alternative investments;
- describe investment and compensation structures commonly used in alternative investments;
- explain investment characteristics of hedge funds;
- explain investment characteristics of private capital;
- explain investment characteristics of natural resources;
- explain investment characteristics of real estate;
- explain investment characteristics of infrastructure;
- describe issues in performance appraisal of alternative investments;
- calculate and interpret returns of alternative investments on both before-fee and after-fee bases.
This reading provides a comprehensive introduction to alternative investments. Some key points of the reading are as follows:
- Alternative investments are supplemental strategies to traditional long-only positions in stocks, bonds, and cash. Alternative investments include investments in five main categories: hedge funds, private capital, natural resources, real estate, and infrastructure.
- Alternative investment strategies are typically active, return-seeking strategies that also often have risk characteristics different from those of traditional long-only investments.
- Characteristics common to many alternative investments, when compared with traditional investments, include the following: lower liquidity, less regulation, lower transparency, higher fees, and limited and potentially problematic historical risk and return data.
- Alternative investments often have complex legal and tax considerations and may be highly leveraged.
- Alternative investments are attractive to investors because of the potential for portfolio diversification resulting in a higher risk-adjusted return for the portfolio.
- Investors can access alternative invests in three ways:
- Fund investment (such as a in a PE fund)
- Direct investment into a company or project (such as infrastructure or real estate)
- Co-investment into a portfolio company of a fund
- Investors conduct due diligence prior to investing in alternative investments. The due diligence approach depends on the investment method (direct, co-investing, or fund investing).
- Operational, financial, counterparty, and liquidity risks may be key considerations for those investing in alternative investments. These risks can be analyzed during the due diligence process. It is critical to perform fund due diligence to assess whether (a) the manager can effectively pursue the proposed investment strategy; (b) the appropriate organizational structure and policies for managing investments, operations, risk, and compliance are in place; and (c) the fund terms appear reasonable.
- Many alternative investments, such as hedge and private equity funds, use a partnership structure with a general partner that manages the business and limited partners (investors) who own fractional interests in the partnership.
- The general partner typically receives a management fee based on assets under management or committed capital (the former is common to hedge funds, and the latter is common to private equity funds) and an incentive fee based on realized profits.
- Hurdle rates, high-water marks, lockup and notice periods, and clawback provisions are often specified in the LPA.
- The fee structure affects the returns to investors (limited partners), with a waterfall representing the distribution method under which allocations are made to LPs and GPs. Waterfalls can be on a whole-of-fund basis (European) or deal-by-deal basis (American).
- Hedge funds are typically classified by strategy. One such classification includes four broad categories of strategies: equity hedge (e.g., market neutral), event driven (e.g., merger arbitrage), relative value (e.g., convertible bond arbitrage), macro and CTA strategies (e.g., commodity trading advisers).
- Funds-of-hedge-funds are funds that create a diversified portfolio of hedge funds. These vehicles are attractive to smaller investors that don’t have the resources to select individual hedge funds and build a portfolio of them.
- Private Capital is a broad term for funding provided to companies that is sourced from neither the public equity nor debt markets. Capital that is provided in the form of equity investments is called private equity, whereas capital that is provided as a loan or other form of debt is called private debt.
- Private equity refers to investment in privately owned companies or in public companies with the intent to take them private. Key private equity investment strategies include leveraged buyouts (e.g., MBOs and MBIs) and venture capital. Primary exit strategies include trade sale, IPO, and recapitalization.
- Private debt refers to various forms of debt provided by investors to private entities. Key private debt strategies include direct lending, mezzanine debt, and venture debt. Private debt also includes specialized strategies, such as CLOs, unitranche debt, real estate debt, and infrastructure debt.
- Natural resources include commodities (hard and soft), agricultural land (farmland), and timberland.
- Commodity investments may involve investing in actual physical commodities or in producers of commodities, but more typically, these investments are made using commodity derivatives (futures or swaps). One can also invest in commodities via a CTA (see hedge funds).
- Returns to commodity investing are based on changes in price and do not include an income stream, such as dividends, interest, or rent (apart from income earned on the collateral). However, timberland offers an income stream based on the sale of trees, wood, and other products. Timberland can be thought of as both a factory and a warehouse. Plus, timberland is a sustainable investment that mitigates climate-related risks.
- Farmland, like timberland, has an income component related to harvest quantities and agricultural commodity prices. However, farmland doesn’t have the production flexibility of timberland, because farm products must be harvested when ripe.
- Real estate includes two major sectors: residential and commercial. Residential real estate is the largest sector, making up some 75% of the market globally. Commercial real estate primarily includes office buildings, shopping centers, and warehouses. Real estate property has some unique features compared with other asset classes, including heterogeneity (no two properties are identical) and fixed location.
- Real estate investments can be direct or indirect, in the public market (e.g., REITs) or private transactions, and in equity or debt.
- The assets underlying infrastructure investments are real, capital intensive, and long lived. These assets are intended for public use, and they provide essential services. Examples include airports, health care facilities, and power plants. Funding is often done on a public–private partnership basis.
- Social infrastructure assets are directed toward human activities and include such assets as educational, health care, social housing, and correctional facilities, with the focus on providing, operating, and maintaining the asset infrastructure.
- Infrastructure investments may also be categorized by the underlying asset’s stage of development. Investing in infrastructure assets that are to be constructed is generally referred to as greenfield investment. Investing in existing infrastructure assets may be referred to as brownfield investment.
- Conducting performance appraisal on alternative investments can be challenging because these investments are often characterized by asymmetric risk–return profiles, limited portfolio transparency, illiquidity, product complexity, and complex fee structures.
- Traditional risk and return measures (such as mean return, standard deviation of returns, and beta) may provide an inadequate picture of alternative investments’ risk and return characteristics. Moreover, these measures may be unreliable or not representative of specific investments.
- A variety of ratios can be calculated in order to review the performance of alternative investments, including the Sharpe ratio, Sortino ratio, Treynor ratio, Calmar ratio, and MAR ratio. In addition, batting average and slugging percentage can also be used. The IRR calculation is often used to evaluate private equity investments, and the cap rate is often used to evaluate real estate investments.
- Redemption rules and lockup periods can bring special challenges to performance appraisal of alternative investments.
- When comparing the performance of alternative investments versus an index, the analyst must be aware that indexes for alternative investments may be subject to a variety of biases, including survivorship and backfill biases.
- Analysts need to be aware of any custom fee arrangements in place that will affect the calculation of fees and performance. These can include such arrangements as fee discounts based on custom liquidity terms or significant asset size; special share classes, such as “founders’ shares”; and a departure from the typical management fee + performance fee structure in favor of “either/or” fees.
Manage your Professional Learning credits
Capital Structure
Corporate Restructuring
Risk Analysis & Management
Fee Structures & Disclosures
Manager Selection
Investment Management Strategies
Active Management
ESG & SRI Investing
Portfolio Optimization & Rebalancing
Return Analysis & Performance Measurement
Investment Products & Asset Classes
Alternative Assets
Commodities
Hedge Funds
Real Estate
Equity Investments
Fixed Income Investments
Asset-Backed Securities
Investment Funds
Financial Regulation
Financial Markets
Economic Conditions
Economic Policies & Systems
- Business Essentials
- Leadership & Management
- Entrepreneurship & Innovation
- Finance & Accounting
- Business in Society
- For Organizations
- Support Portal
- Media Coverage
- Founding Donors
- Leadership Team
- Harvard Business School →
- HBS Online →
- Business Insights →
Business Insights
Harvard Business School Online's Business Insights Blog provides the career insights you need to achieve your goals and gain confidence in your business skills.
- Career Development
- Communication
- Decision-Making
- Earning Your MBA
- Negotiation
- News & Events
- Productivity
- Staff Spotlight
- Student Profiles
- Work-Life Balance
- Alternative Investments
- Business Analytics
- Business Strategy
- Design Thinking and Innovation
- Disruptive Strategy
- Economics for Managers
- Entrepreneurship Essentials
- Financial Accounting
- Global Business
- Launching Tech Ventures
- Leadership Principles
- Leadership, Ethics, and Corporate Accountability
- Leading with Finance
- Management Essentials
- Negotiation Mastery
- Organizational Leadership
- Power and Influence for Positive Impact
- Strategy Execution
- Sustainable Business Strategy
- Sustainable Investing
What Are Alternative Investments?
- 08 Jul 2021
Expert investors know the value of diversifying their portfolio. In an ever-evolving market, it’s critical to spread risk across a variety of different investment types, so that if one takes a hit, the others can offset the loss.
For example, those trying to prepare for a recession would want to combat a volatile stock market by balancing their portfolio out with a mix of investments, such as bonds, equity funds, and cash. To effectively maximize the value of your portfolio, though, it’s crucial to understand alternative investments .
Below is a definition of what alternative investments are, how they differ from traditional investments, and examples of alternative investments.
An alternative investment is a financial asset that’s not stocks, bonds, or cash. These types of investments are typically illiquid—meaning they can’t be easily sold or converted into cash—and are often unregulated by the U.S. Securities and Exchange Commission (SEC) or other regulatory bodies. Alternative investments are also sometimes called alternative assets .
Alternative investments used to be limited to high-net-worth and institutional investors, but are becoming more mainstream. Retail, or individual, investors are increasingly getting the opportunity to incorporate these types of assets into their portfolios to reduce overall risk and maximize value over the longer term.
It’s become one of the fast-growing fields in finance: The alternative investment industry is expected to grow 59 percent by 2023, reaching $14 trillion in assets under management, according to research firm Preqin . One reason for the steady rise is that investors are looking for more asset classes with lower correlations—a measurement of how two securities move in relation to each other. The lower the correlation, the less likely the two will react the same way during an economic downturn or upswing.
Access your free e-book today.
The Difference Between Alternative and Traditional Investments
Traditional investments are investments that can be bought, sold, and traded on a public market. Stocks, bonds, and cash, or cash equivalents, are considered to be traditional investments. Because traditional investments are publicly traded, they can be converted into cash fairly easily and are considered highly liquid. They're also regulated by various regulatory bodies, such as the SEC, Federal Reserve Board (FRB), Federal Deposit Insurance Corporation (FDIC), and Financial Conduct Authority (FCA).
Alternative investments, on the other hand, are not publicly traded. This makes them less liquid than traditional investments and harder to convert into cash quickly. They can be exceptionally complex and typically not heavily regulated. Because they’re not heavily regulated, there’s often less transparency around these types of investments, making it incredibly important for investors to perform due diligence in evaluating an investment.
Alternative investments are considered riskier than traditional investments yet carry a greater opportunity for reward. Due to their illiquidity, alternative investments typically have longer investment timelines than traditional investments.
Types of Alternative Investments
Because the term “alternative investments” is so broad, many investments can fall under its umbrella. Some of the most common types of alternative investments include:
- Private equity : Equity in a privately held company
- Private debt : Debt investments not held by a bank or traded on the open market
- Hedge funds : Investment funds that primarily trade illiquid assets
- Real estate : Including land, buildings, and other structures
- Commodities : Real, physical assets, such as agricultural products, oil, and precious metals
- Collectibles : A range of physical items, such as artwork, cars, and wine
- Structured products : Alternative assets that involve fixed income
- Venture capital : Investments made in privately held startups
- Distressed debt : Debt purchased from a failing company, with the hope of that company turning around
- Derivatives : Financial assets that are derived from another asset
- Intellectual property : Intangible assets that can include anything from patents to creative works, such as film or music catalogs
Examples of Alternative Investments
The list of alternative investments is long, but here are four of the most popular examples from above that an investor might want to consider adding to their portfolio.
1. Private Equity
Private equity is equity, or ownership, not listed on a public exchange. Private equity firms raise funds from non-institutional and institutional investors and use that money to buy a business with the goal of later selling it to make a profit.
Depending on what stage the company is in, private equity investments can take on different forms, such as:
- Venture capital : Funding used to help promising startup and early-stage ventures gain traction and achieve long-term success
- Growth capital : An investment that enables mature companies to build out new product lines, expand to different geographies, or restructure the organization
- Buyouts : Capital used to purchase another company or one of its divisions
Related : Financial Terminology: 20 Financial Terms to Know
2. Private Debt
When a company is looking to grow its business, it may not have the money or assets to expand. Instead, it might take on private debt , or receive a loan from a private debt fund, as an alternative to bank lending.
Firms that offer private debt typically make money off interest payments from the loan provided, as well as from the repayment of the loan itself. Private debt is illiquid and cannot be traded, yet can balance out a firm’s fixed-income investments.
3. Hedge Funds
A hedge fund is a pooled investment structure that uses different strategies to earn alpha , or an active return on investment. Hedge funds are exclusively for high-net-worth individuals and institutional investors and operate with much less regulatory oversight by the SEC. Most hedge funds invest in traditional securities, such as stocks, bonds, and commodities.
A common hedge fund strategy is long/short equity , in which investors will take a long position, or buy, a stock they think will rise in value and take a short position, or sell, a stock expected to decline. The goal is to minimize the amount an investor can lose, while profiting from gains from the long position and price declines from the short position.
4. Real Estate
Real estate is the world’s biggest asset class , and is typically known as an alternative when individuals buy property such as office buildings or residential apartments as an investment.
Real estate shares similar characteristics with bonds, in that landlords earn current cash flow from tenants, and equity, in that their goal is to increase the value of their property over time. Yet, an added benefit of real estate is that the market is less volatile than stocks and bonds.
Investors who don’t want to be landlords might put their money into a real estate investment trust (REIT). A REIT manager will invest their money in different properties, and then manage and collect rent on those properties. Investors will earn annual profits in the form of dividends , or a share in the properties’ profits.
Why Alternative Investments?
There are several reasons why you should leverage alternative investments.
First, alternative assets have a low correlation with traditional investments like those traded on the stock market. Because of this low correlation, alternative investments often perform better than traditional investments during a market downturn. This means that incorporating alternative investments into a portfolio can be an effective means of increasing diversification and reducing risk.
While alternatives are more complex and often have high risk profiles, they can also generate higher returns than traditional investment types—reportedly sometimes in the range of 50 to 100 percent . To account for this increased potential for risk, alternative investments will typically have a longer investment horizon than more traditional investments.
Lastly, there’s a wider range of alternative investment opportunities, such as those listed above, providing you with more diverse options than the traditional stocks, bonds, and cash.
Diversifying Your Portfolio with Alternative Investments
Now's the time to start exploring the alternative investments industry. By knowing how to speak the language of alternative investments and assess opportunities, you can maximize the value of your portfolio and stand out in one of the fastest-growing fields in finance.
Are you interested in learning more about alternative investments? Explore our five-week online Alternative Investments course and gain the skills, confidence, and strategies to assess potential investment opportunities.
This post was updated on July 8, 2021. It was originally published on April 28, 2020.
About the Author
- Corporate Finance
- Mutual Funds
- Investing Essentials
- Fundamental Analysis
- Portfolio Management
- Trading Essentials
- Technical Analysis
- Risk Management
- Company News
- Markets News
- Cryptocurrency News
- Personal Finance News
- Economic News
- Government News
- Wealth Management
- Budgeting/Saving
- Credit Cards
- Home Ownership
- Retirement Planning
- Best Online Brokers
- Best Savings Accounts
- Best Home Warranties
- Best Credit Cards
- Best Personal Loans
- Best Student Loans
- Best Life Insurance
- Best Auto Insurance
- Practice Management
- Financial Advisor Careers
- Investopedia 100
- Portfolio Construction
- Financial Planning
- Investing for Beginners
- Become a Day Trader
- Trading for Beginners
- All Courses
- Trading Courses
- Investing Courses
- Financial Professional Courses
What Is an Alternative Investment?
- How It Works
- Alternative Investments FAQs
Alternative Investments
What are alternative investments definition and examples.
James Chen, CMT is an expert trader, investment adviser, and global market strategist.
:max_bytes(150000):strip_icc():format(webp)/photo__james_chen-5bfc26144cedfd0026c00af8.jpeg "alternative investments introduction")
Marguerita is a Certified Financial Planner (CFP®), Chartered Retirement Planning Counselor (CRPC®), Retirement Income Certified Professional (RICP®), and a Chartered Socially Responsible Investing Counselor (CSRIC). She has been working in the financial planning industry for over 20 years and spends her days helping her clients gain clarity, confidence, and control over their financial lives.
:max_bytes(150000):strip_icc():format(webp)/20171011-Rita-Cheng-01-low-RitaCheng-75f7b7411e684a0baf12bc7ff1763b54.JPG "alternative investments introduction")
Skylar Clarine is a fact-checker and expert in personal finance with a range of experience including veterinary technology and film studies.
:max_bytes(150000):strip_icc():format(webp)/IMG_4342copy-e7fa5d528e4a437aaef2f1eaf3ba6cb2.JPG "alternative investments introduction")
Investopedia / NoNo Flores
An alternative investment is a financial asset that does not fall into one of the conventional investment categories. Conventional categories include stocks, bonds, and cash. Alternative investments can include private equity or venture capital, hedge funds, managed futures, art and antiques, commodities, and derivatives contracts. Real estate is also often classified as an alternative investment.
Key Takeaways
- An alternative investment is a financial asset that does not fit into the conventional equity/income/cash categories.
- Private equity or venture capital, hedge funds, real property, commodities, and tangible assets are all examples of alternative investments.
- Most alternative investments have fewer regulations from the U.S. Securities and Exchange Commission (SEC) and tend to be somewhat illiquid.
- While traditionally aimed at institutional or accredited investors, alternative investments have become feasible to retail investors via alternative funds.
Understanding Alternative Investments
Most alternative investment assets are held by institutional investors or accredited, high-net-worth individuals because of their complex nature, lack of regulation, and degree of risk. Many alternative investments have high minimum investments and fee structures, especially when compared to mutual funds and exchange-traded funds (ETFs). These investments also have less opportunity to publish verifiable performance data and advertise to potential investors. Although alternative assets may have high initial minimums and upfront investment fees, transaction costs are typically lower than those of conventional assets due to lower levels of turnover.
Most alternative assets are fairly illiquid, especially compared to their conventional counterparts. For example, investors are likely to find it considerably more difficult to sell an 80-year old bottle of wine compared to 1,000 shares of Apple Inc. due to a limited number of buyers. Investors may have difficulty even valuing alternative investments, since the assets, and transactions involving them, are often rare. For example, a seller of a 1933 Saint-Gaudens Double Eagle $20 gold coin may have difficulty determining its value, as there are only 13 known to exist and only one can be legally owned.
Regulation of Alternative Investments
Even when they don't involve unique items like coins or art, alternative investments are prone to investment scams and fraud due to the lack of regulations.
Alternative investments are often subject to a less clear legal structure than conventional investments. They do fall under the purview of the Dodd-Frank Wall Street Reform and Consumer Protection Act , and their practices are subject to examination by the U.S. Securities and Exchange Commission (SEC). However, they usually don't have to register with the SEC. As such, they are not overseen or regulated by the SEC as are mutual funds and ETFs.
So, it is essential that investors conduct extensive due diligence when considering alternative investments. In some cases, only accredited investors may invest in alternative offerings. Accredited investors are those with a net worth exceeding $1 million—not counting their primary residence—or with an annual income of at least $200,000 (or $300,000 combined with a spousal income). Financial professionals who hold a FINRA Series 7, 65, or 82 license may also qualify as an accredited investor.
Some alternative investments are only available to accredited investors—e.g., those with a net worth above $1 million, or an annual income of at least $200,000.
Strategy for Alternative Investments
Alternative investments typically have a low correlation with those in standard asset classes. This low correlation means they often move counter to the stock and bond markets. This feature makes them a suitable tool for portfolio diversification. Investments in hard assets, such as gold, oil, and real property, also provide an effective hedge against inflation, which hurts the purchasing power of paper money.
Because of this, many large institutional funds such as pension funds and private endowments often allocate a small portion of their portfolios—typically less than 10%—to alternative investments such as hedge funds .
The non-accredited retail investor also has access to alternative investments. Alternative mutual funds and exchange-traded funds—also called alt funds or liquid alts—are now available. These alt funds provide ample opportunity to invest in alternative asset categories, previously difficult and costly for the average individual to access. Because they are publicly traded, alt funds are SEC-registered and regulated, specifically by the Investment Company Act of 1940 .
Counterweight to conventional assets
Portfolio diversification
Inflation hedge
High rewards
Difficult to value
Fewer regulatory requirements
Example of Alternative Investments
Just being regulated does not mean that alt funds are safe investments. The SEC notes, "Many alternative mutual funds have limited performance histories."
Also, although its diversified portfolio naturally mitigates the threat of loss, an alt fund is still subject to the inherent risks of its underlying assets. Indeed, the track record of ETFs that specialize in alternative assets has been mixed.
For example, as of January 2022, the SPDR Dow Jones Global Real Estate ETF had an annualized five-year return of 6.17%. In contrast, the SPDR S&P Oil & Gas Exploration & Production ETF posted a return of –6.40% for the same period.
What Are the Key Characteristics of Alternative Investments?
Alternative investments tend to have high fees and minimum investments, compared to retail-oriented mutual funds and ETFs. They also tend to have lower transaction costs, and it can be harder to get verifiable financial data for these assets. Alternative investments also tend to be less liquid than conventional securities, meaning that it may be difficult even to value some of the more unique vehicles because they are so thinly traded.
How Can Alternative Investments Be Useful to Investors?
Some investors seek out alternative investments because they have a low correlation with the stock and bond markets, meaning that they maintain their values in a market downturn. Also, hard assets such as gold, oil, and real property are effective hedges against inflation. For these reasons, many large institutions such as pension funds and family offices seek to diversify some of their holdings in alternative investment vehicles.
What Are the Regulatory Standards for Alternative Investments?
Regulations for alternative investments are less clear than they are for more traditional securities. Although alternative investment vehicles are regulated by the SEC, their securities do not have to be registered. As a result, most of these investment vehicles are only available to institutions or wealthy accredited investors .
U.S. Mint. " United States Mint Makes History with Display of Ten 1933 Double Eagles ."
U.S. Mint. " The United States Government to Sell the Famed 1933 Double Eagle, the Most Valuable Gold Coin in the World ."
Commodity Futures Trading Commission. " H.R. 4173 ," Page 593.
U.S. Securities and Exchange Commission. " Mutual Funds and ETFs: A Guide for Investors ," Page 10.
U.S. Securities and Exchange Commission. " Accredited Investors – Updated Investor Bulletin ."
U.S. Securities and Exchange Commission. " Alternative Mutual Funds ."
State Street Global Advisors. " SPDR Dow Jones Global Real Estate ETF ."
State Street Global Advisors. " SPDR S&P Oil & Gas Exploration & Production ETF ."
Hedge Funds
- Terms of Use
- Editorial Policy
- Privacy Policy
- Do Not Sell My Personal Information
By clicking “Accept All Cookies”, you agree to the storing of cookies on your device to enhance site navigation, analyze site usage, and assist in our marketing efforts.
- Manage communications
- Mutual Fund & 529 accounts
I invest on behalf of my clients.
I consult or invest on behalf of a financial institution.
I want to learn more about BlackRock.
To reach a different BlackRock site directly, please update your user type .
Alternative investments are essential
Mark Everitt: Welcome to BlackRock's 2022 Private Markets Outlook. I'm Mark Everitt, the head of research and strategy for BlackRock Alternatives, and I'm joined today in discussion by Jim Barry, who is the CIO for BlackRock Alternatives. We are going to be talking about our 2022 private market outlook. It has a panel overview in it and a deep dive into the world of private credit, private equity, and also real assets. And today we're going to bring you three core elements from that discussion. Firstly, we're going to dig into how we see the private markets today and how we see them evolving in the future.
Then secondly, in a world where returns are challenged across public and private markets, we're going to look at the role that thematics might play in the 2022 private market vintages. And there we're going to cover themes such as technology and decarbonisation. But also in our outlook, you will see coverage of health care, changing consumption patterns and growth in Asia as core thematics that we anticipate in 2022.
So let's get going. And I'd like to turn over to Jim Barry and Jim, what are your reflections on the state of the private markets as you see them today.
Jim Barry: Thanks, Mark. Hi, everybody. Look, we have and are living through extraordinary times. I mean, last year really is unprecedented in economic history. You know with the surge of growth on the back of the broad economic restart, both the initial phase of pandemic, we had really supply dislocation driven inflation. And then we had central banks implementing a new framework where they are taking a much more benign view on that inflation, creating a great year for equities, not such a good one for bonds, but really, in that context, private markets had a very successful year with continual accumulation of capital really getting deployed at scale and we saw it in our own business quite particularly.
But look, I think that if Omicron tells you everything or anything, it's the fact that there is no back to normal. We're dealing with a new normal where ultimately combinations of behaviours, vaccinations and treatments allows us to deal with an endemic virus. But I think one has to take account of that as we think about our investing. And there's no question the pandemic has accelerated some massive structural thematic changes and in turn generated some new ones. And we'll come back to that.
But I think as we look out this year and beyond, I think you've got to see where we've got to restart that's a bit delayed rather than derailed. I think you're looking at a stronger inflationary environment, maybe without the sort of current headline rates, but certainly at a level ahead of pre pandemic levels. And I think you're going to see this new central bank framework lead to a tightening of monetary policy leading to some increased rates, but very delayed as you might expect for the given level of inflation. Into that mix, we play with private markets that's a way you as a client, as an investor, can get real exposure to some of these macro dynamics as well as thematics we will talk about.
Mark Everitt: Yeah, I think just picking up on that, Jim, I think one thing I wanted to mention is just the growth that we have in the private markets. And now I think the private markets, you know, around about 8/9 trillion, depending on how you add it up. I just oversize now where there is, what I would call convergence happening. And I mean convergence in two dimensions, right? I think Firstly, there's convergence between the private and the public markets. And secondly, there's convergence between what used to be kind of discrete elements of the private markets.
And what I mean by this is that there are real opportunities for investors. Private markets in many ways are becoming larger because of this convergence. But also one has to navigate carefully and think about, you know, financing of companies. High quality corporate borrowers can now toggle between the private and the public markets. So if you are talking to a borrower, you're looking for an investment. You need to have a relationship where you can discuss the private and the public financing options, because that company could start with private financing, go to public, toggle back to a combination or back to private overall. And being involved with that company having access now, it's not just about being in the private markets, it's about being in both. Similarly, investing in private equity used to always be through just the primary funds. Now, secondary funds offer a really interesting way to play continuation vehicles. And I think we'll see more and more high-quality companies remaining private through their lives and have access to new investors coming about through the secondary markets. Something investors to think about there, is this concept of convergence and how you are playing that opportunity set between those markets.
But, Jim, I'd like to move on into thematics. We talked about Start, and I didn't mention perhaps the strongest thematic of all which is decarbonization, something I know it's close to your heart. It's close to your background. Tell us your thoughts on how you see decarbonisation playing out in the private markets.
Jim Barry: Well, Mark, I think your decarbonisation is going to dominate the next two to three decades from an investment perspective. I think that there's been an inflection point in terms of the acceptance of the need to address climate change. And we've seen that play out in just a sort of a tsunami of a new policy that will only build momentum over time. And, I think we're all getting head around the scale of transition, but the challenge is the pace. It's effectively something at the scale of the industrial revolution in half the time frame.
And so into that, there's going to be almost limitless opportunities to play. We've got to effectively get more for every unit of energy we put into our global economy. We've got to electrify anything we can. We then got to decarbonize electricity generation and then finally, there are categories of difficult things. Industrial processes heat, large scale transport, aviation, maritime. These are things that will require fairly unique solutions and a lot of those solutions really still not clear. But I think from a private market perspective, there's just going to be a whole host of opportunity, equity, and credit across the risk return spectrum to play into that in a very focused way, allowing you to curate very specific exposures and opportunities.
Mark Everitt: Yeah, definitely lots to do there. I'm going to talk quickly about technology, which is just a thematic that is everywhere in public and private world. We have this saying same ocean, different boats, meaning that in the private world, you can play it in a very curated, specific way. And I think across our verticals, we see just technology opportunities everywhere. But the thing I point out to people is knowing the words technology being able to talk a little about it isn't going to be enough. There's going to be real winners and losers in this space, and you are going to have to pick carefully.
Let me give you a few examples of how we see it affecting our space. So, you know, I think Firstly, at the corporate level, companies are struggling to maintain operating margins for some of the challenges they've had in 2021. They're also looking to grow and they're using technology, technology being used to manage supply chain issues. It's been used to improve efficiency. It's been used to manage Labour inflation that's happened to workforce through robotics and automation, and it's giving companies new ways to engage directly with consumers and therefore have that direct relationship and protect margin. In the real assets space, digitization is huge. We're seeing it across the decarbonisation spectrum. We're seeing introduction of different ways of measuring and managing and monitoring energy delivery, for sure. But we're also seeing it in real assets in real estate. If you look at the tremendous growth in logistics and the demands that are there for prime locations and the effect that there's been on yields, there has been quite profound, and we're also starting to look at opportunities in the way in which people change the way in their living, engaging technology such as green tech to upgrade buildings such as offices and improve rental income and exit values through doing that.
So technology just a massive, persistent theme. Whether it's cloud AI software as a service, it's really permeating all of the verticals and something I think requires that multi-dimensional approach to really understand what is going on there. And we're seeing that multi dimensionality everywhere. Right. We're seeing assets come together that previously might have been a bit discreet. Think about the delivery of power such as gas into a residential home alongside fibre, two different areas of expertise coming together in one corporate in one opportunity. Very interesting, multi-dimensional space.
What are your closing thoughts, Jim?
Jim Barry: Thanks, Mark. I'll close with a few specific opportunities that I see. Clearly decarbonisation, a lot of new assets required, clearly renewables being an obvious area, but a whole range of assets need further evolution and development. I think that I definitely would look at the credit space generally, you touched on the vast array of options now, but I would look at the stress and opportunistic too. I think some of the scar tissue from the pandemic has yet to really appear and I think it will appear in 2022.
Secondaries, you touched on it earlier. I think that's got the best supply demand dynamic for assets in the private market space, and I think better risk adjusted returns the most. And then I would just also touch on growth equity as it plays into some of these big thematics, not least decarbonisation a lot of new stuff to be done and growth opportunities to be exploited.
Mark Everitt: Great. Thank you, Jim, and thank you everyone for listening today, we hope to engage with you in 2022 and you know where to find us and have a healthy and successful 2022 thank you very much.
ALTH0322U/M-2070517
Mark Everitt: Thank you for that perspective. I'd like to actually get from your perspective on our second topic now, which is infrastructure. And although, I'm in, my research role every day, I was really staggered about the discussion we had at our internal investment forum recently, where we had a real deep dive into infrastructure. And what really staggered me was just the scope of investment there. I mean, numbers going between US$40 trillion to 80 trillion, depending on the time frame. That's a 40-year number, the larger number, but those are just incredible numbers. And when you think about the private markets, as a US$10 trillion industry, you can see that even if a small part of that 40 to 80 trillion comes through the private markets, the rest of course in public or government financed, even a small part of that is just going to be massive in terms of the scale. And that really sets us up for some interesting opportunities. And I'd love to hear your perspective on infrastructure going forward. Wei Li: It's incredible, isn't it? And another topic that is very related to the infrastructure debate is the net zero transition. At a forum, a lot of topics divided opinions, but what didn't divide opinion is that the net zero transition is going to have significant consequences in terms of the investment implications and the fact that we absolutely need to get there. So if you think about infrastructure, as part of that the global infrastructure rebuild is really critical in terms of getting us to net zero transition. And if you think about how governments and companies have already reacted, they are really reorienting their investment around the rebuild of global infrastructure and also, of new infrastructure projects as well. So if you think about, specifically, in the case of the US, significant infrastructure outlay proposals have already been proposed by the Biden administration, not only around the green transition, but also making up for a long period of underinvestment in traditional infrastructure as well. So here interesting themes that are emerging ranging from renewables, urbanization, digitalization, electrification, and so all very exciting stuff. And as a result of that, we see huge investment opportunities in the coming years and decades around this space, not only in developed world, but also in China. Mark Everitt: Yeah. That's a really nice segway to a third topic, which is China. And before we get there, though, I think, as you mentioned, net zero, I think one thing our investors really need to be focused on are there different paths to net zero. We know where we are today. We know where we want to be, but there are many actual different ways we can get along that journey. And that's going to have real implications for private market assets and for infrastructure assets. And understanding those paths being prepared for those paths, I think is going to really differentiate private market returns over the future. So a lot of work to do that and as you say, very exciting. ALTH0721U/M-1707731
Mark Everitt: And it takes us to our third topic as you alluded to just recently of China.
And you know, I think, most investors understand that as they slice and dice their portfolios, they probably underweight China. Most private market investors probably understand that as well, but we're grappling with lots of different thoughts around China and the outlook for China. And I'd like to just pick your brains on how investors should be thinking about China and how you see the landscape.
Wei Li: Absolutely. So we have done a lot of work around investing in China. And our study shows there's a lot of portfolios are underrepresenting in China versus a standard benchmark. And also, even standard benchmarks are underappreciating the significant benefits that China assets can bring to portfolios over the longer term, which is why strategically we are overweight China assets across the public market, private market, and also across equities and bonds.
Now with a bit of a near-term focus thinking about this year, navigating the Chinese markets this year, what's really interesting is that China came out of the crisis first and followed by the US, followed by the rest of the world as we see playing out this year, but as a result of the very quick recovery initially. What we're seeing right now in China, it's the second derivative growth acceleration is moderating, is slowing down a bit. And at the same time, what we're witnessing in China is this, what we call, quality revolution, which puts a huge amount of focus on the quality of the growth mix, as well as the quantity the headline growth number.
And as a result of the quality revolution, what we're seeing is that even though growth momentum is slowing down is not being met with a huge amount of stimulus that we see happening in developed world. And as a result of that, we see the dynamics, the environment for this year is a bit more nuanced in comparison with what we saw last year. But what is really, really interesting to note, if you think about kind of the market dynamics this year is that China assets, China bonds, and China assets more broadly have really demonstrated resiliency and diversification in the context of a portfolio construct, where, for example, earlier this year, because of rate volatility in the US, rate reaching a broader risk markets were going through a bit of a volatile correction period.
We do not see the same magnitude taking place in China Government Bond, space, for example. So it still goes to show that, especially as the spheres of influence between US and China move further apart in the context of the strategic rivalry confrontation between the two superpowers, the diversification benefits of what China assets can bring to a portfolio is very valuable, is very pronounced, even in the context of what's happening this year and certainly over a longer term period. The last thing I would give you is specifically around investing in China is that if you think about the range of opportunities that China has to offer, if you think about some of the really exciting investment themes, so here we're looking at dual circulation, for example, to be a bit more self-reliant in terms of drivers of growth.
We're talking about urbanization. We're talking about digitalization. We are talking about decarbonization. When we look at all this interesting and exciting themes that will be driving markets for years to come, when we consider what these opportunities can present ourselves, we have to consider the whole spectrum of the market from equities to debt from public to private market, because there are for certain themes that are harder to access. We have to think a bit more holistically really from a portfolio perspective.
Mark Everitt: Well, thank you, Wei, for those thoughts. And I think as we look at each of those three topics, whether it's China, whether it's the growth of infrastructure, or whether it's the threat of inflation, I think those are valuable insights to us, as we underwrite and build portfolios to be resilient and, as you say, diversified over the long term. For our listeners, I hope you enjoyed today's video segment. And as always, thank you for joining us and look forward to seeing you next time. Stay safe. Stay healthy.
ALTH0721U/M-1707731
To view this video please enable JavaScript, and consider upgrading to a web browser that supports HTML5 video.
Mark Everitt: Welcome to BlackRock's 2022 Private Markets Outlook. I'm Mark Everitt, the head of research and strategy for BlackRock Alternatives, and I'm joined today in discussion by Jim Barry, who is the CIO for BlackRock Alternatives. We are going to be talking about our 2022 private market outlook. It has a panel overview in it and a deep dive into the world of private credit, private equity, and also real assets. And today we're going to bring you three core elements from that discussion. Firstly, we're going to dig into how we see the private markets today and how we see them evolving in the future.
Then secondly, in a world where returns are challenged across public and private markets, we're going to look at the role that thematics might play in the 2022 private market vintages. And there we're going to cover themes such as technology and decarbonisation. But also in our outlook, you will see coverage of health care, changing consumption patterns and growth in Asia as core thematics that we anticipate in 2022.
So let's get going. And I'd like to turn over to Jim Barry and Jim, what are your reflections on the state of the private markets as you see them today.
But look, I think that if Omicron tells you everything or anything, it's the fact that there is no back to normal. We're dealing with a new normal where ultimately combinations of behaviours, vaccinations and treatments allows us to deal with an endemic virus. But I think one has to take account of that as we think about our investing. And there's no question the pandemic has accelerated some massive structural thematic changes and in turn generated some new ones. And we'll come back to that.
But I think as we look out this year and beyond, I think you've got to see where we've got to restart that's a bit delayed rather than derailed. I think you're looking at a stronger inflationary environment, maybe without the sort of current headline rates, but certainly at a level ahead of pre pandemic levels. And I think you're going to see this new central bank framework lead to a tightening of monetary policy leading to some increased rates, but very delayed as you might expect for the given level of inflation. Into that mix, we play with private markets that's a way you as a client, as an investor, can get real exposure to some of these macro dynamics as well as thematics we will talk about.
Mark Everitt: Yeah, I think just picking up on that, Jim, I think one thing I wanted to mention is just the growth that we have in the private markets. And now I think the private markets, you know, around about 8/9 trillion, depending on how you add it up. I just oversize now where there is, what I would call convergence happening. And I mean convergence in two dimensions, right? I think Firstly, there's convergence between the private and the public markets. And secondly, there's convergence between what used to be kind of discrete elements of the private markets.
And what I mean by this is that there are real opportunities for investors. Private markets in many ways are becoming larger because of this convergence. But also one has to navigate carefully and think about, you know, financing of companies. High quality corporate borrowers can now toggle between the private and the public markets. So if you are talking to a borrower, you're looking for an investment. You need to have a relationship where you can discuss the private and the public financing options, because that company could start with private financing, go to public, toggle back to a combination or back to private overall. And being involved with that company having access now, it's not just about being in the private markets, it's about being in both. Similarly, investing in private equity used to always be through just the primary funds. Now, secondary funds offer a really interesting way to play continuation vehicles. And I think we'll see more and more high-quality companies remaining private through their lives and have access to new investors coming about through the secondary markets. Something investors to think about there, is this concept of convergence and how you are playing that opportunity set between those markets.
But, Jim, I'd like to move on into thematics. We talked about Start, and I didn't mention perhaps the strongest thematic of all which is decarbonization, something I know it's close to your heart. It's close to your background. Tell us your thoughts on how you see decarbonisation playing out in the private markets.
Jim Barry: Well, Mark, I think your decarbonisation is going to dominate the next two to three decades from an investment perspective. I think that there's been an inflection point in terms of the acceptance of the need to address climate change. And we've seen that play out in just a sort of a tsunami of a new policy that will only build momentum over time. And, I think we're all getting head around the scale of transition, but the challenge is the pace. It's effectively something at the scale of the industrial revolution in half the time frame.
And so into that, there's going to be almost limitless opportunities to play. We've got to effectively get more for every unit of energy we put into our global economy. We've got to electrify anything we can. We then got to decarbonize electricity generation and then finally, there are categories of difficult things. Industrial processes heat, large scale transport, aviation, maritime. These are things that will require fairly unique solutions and a lot of those solutions really still not clear. But I think from a private market perspective, there's just going to be a whole host of opportunity, equity, and credit across the risk return spectrum to play into that in a very focused way, allowing you to curate very specific exposures and opportunities.
Mark Everitt: Yeah, definitely lots to do there. I'm going to talk quickly about technology, which is just a thematic that is everywhere in public and private world. We have this saying same ocean, different boats, meaning that in the private world, you can play it in a very curated, specific way. And I think across our verticals, we see just technology opportunities everywhere. But the thing I point out to people is knowing the words technology being able to talk a little about it isn't going to be enough. There's going to be real winners and losers in this space, and you are going to have to pick carefully.
Let me give you a few examples of how we see it affecting our space. So, you know, I think Firstly, at the corporate level, companies are struggling to maintain operating margins for some of the challenges they've had in 2021. They're also looking to grow and they're using technology, technology being used to manage supply chain issues. It's been used to improve efficiency. It's been used to manage Labour inflation that's happened to workforce through robotics and automation, and it's giving companies new ways to engage directly with consumers and therefore have that direct relationship and protect margin. In the real assets space, digitization is huge. We're seeing it across the decarbonisation spectrum. We're seeing introduction of different ways of measuring and managing and monitoring energy delivery, for sure. But we're also seeing it in real assets in real estate. If you look at the tremendous growth in logistics and the demands that are there for prime locations and the effect that there's been on yields, there has been quite profound, and we're also starting to look at opportunities in the way in which people change the way in their living, engaging technology such as green tech to upgrade buildings such as offices and improve rental income and exit values through doing that.
So technology just a massive, persistent theme. Whether it's cloud AI software as a service, it's really permeating all of the verticals and something I think requires that multi-dimensional approach to really understand what is going on there. And we're seeing that multi dimensionality everywhere. Right. We're seeing assets come together that previously might have been a bit discreet. Think about the delivery of power such as gas into a residential home alongside fibre, two different areas of expertise coming together in one corporate in one opportunity. Very interesting, multi-dimensional space.
Jim Barry: Thanks, Mark. I'll close with a few specific opportunities that I see. Clearly decarbonisation, a lot of new assets required, clearly renewables being an obvious area, but a whole range of assets need further evolution and development. I think that I definitely would look at the credit space generally, you touched on the vast array of options now, but I would look at the stress and opportunistic too. I think some of the scar tissue from the pandemic has yet to really appear and I think it will appear in 2022.
Secondaries, you touched on it earlier. I think that's got the best supply demand dynamic for assets in the private market space, and I think better risk adjusted returns the most. And then I would just also touch on growth equity as it plays into some of these big thematics, not least decarbonisation a lot of new stuff to be done and growth opportunities to be exploited.
BlackRock is Tomorrow’s Alternatives Platform
BlackRock can look beyond public markets and traditional investments to find solutions in real estate, infrastructure , private equity , credit , hedge funds and multi-alternatives. We seek to deliver outperformance with true partnership . BlackRock is well-equipped to meet your needs on this journey. We provide you:
- Mutual funds
- iShares ETFs
- Closed-end funds
- Commodity funds
- Stock funds
- Multi-asset funds
- Real estate funds
- Science and Technology Trust
- Resources & Commodities Strategy Trust
- Global Allocation Fund
- LifePath Index Retirement Fund
- Technology Opportunities Fund
- iShares Core S&P 500 ETF
- All funds All funds
- 529 College Savings Plan 529 College Savings Plan
- Alternative investments
- Sustainable investing
- Factor-based investing
- Systematic investing
- Retirement income solutions
- LifePath® target date funds
- Fundamental Equities
- Private Equity
- Real Assets
- All investment strategies All investment strategies
- Weekly commentary
- Global investment outlook
- BlackRock Investment Institute
- Portfolio management views
- Education center
- Retirement volatility strategies
- Planning for retirement
- What is a 401(K)?
- What is an iShares ETF?
- Document library
- Shareholder reports
- Regulatory documents
- Share classes and loads
- Tax information
- Forms & Applications
- Tools & calculators
- LifePath spending tool
- LifePath selector tool
- iShares core builder
- College saving estimator
- All insights All insights
- The Bid podcast The Bid podcast
- About BlackRock
- Corporate sustainability
- Investment stewardship
- BlackRock retirement
- The road to net zero
- Customer service
As a global investment manager and fiduciary to our clients, our purpose at BlackRock is to help everyone experience financial well-being. Since 1999, we've been a leading provider of financial technology, and our clients turn to us for the solutions they need when planning for their most important goals.
The information on this website is intended for U.S. residents only. The information provided does not constitute a solicitation of an offer to buy or an offer to sell securities in any jurisdiction to any person to whom it is not lawful to make such an offer.
Incorporating alternative investments into a portfolio presents the opportunity for significant losses including in some cases, losses which exceed the principal amount invested. Also, some alternative investments have experienced periods of extreme volatility and in general, are not suitable for all investors. Asset allocation and diversification strategies do not ensure profit or protect against loss in declining markets.
Investing in alternative strategies such as a long/short strategy, presents the opportunity for losses which exceed the principal amount invested.
Hedge funds may not be suitable for all investors and often engage in speculative investment practices which increase investment risk; are highly illiquid; are not required to provide periodic prices or valuation; may not be subject to the same regulatory requirements as mutual funds; and often employ complex tax structures.
Utilizing private equity involves significant risks along with the opportunity for substantial losses.
Asset allocation and diversification may not protect against market risk, loss of principal or volatility of returns.
International investing involves risks, including risks related to foreign currency, limited liquidity, less government regulation, and the possibility of substantial volatility due to adverse political, economic or other developments. These risks often are heightened for investments in emerging/ developing markets, in concentrations of single countries or smaller capital markets.
Carefully consider the Funds' investment objectives, risk factors, and charges and expenses before investing. This and other information can be found in the Funds' prospectuses or, if available, the summary prospectuses which may be obtained visiting the iShares ETF and BlackRock Mutual Fund prospectus pages. Read the prospectus carefully before investing.
Prepared by BlackRock Investments, LLC, member FINRA.
Not FDIC Insured | May Lose Value | No Bank Guarantee
©2023 BlackRock, Inc. or its affiiliates. All Rights Reserved. BLACKROCK, BLACKROCK SOLUTIONS, BUILD ON BLACKROCK, ALADDIN, iSHARES, iBONDS, FACTORSELECT, iTHINKING, iSHARES CONNECT, FUND FRENZY, LIFEPATH, SO WHAT DO I DO WITH MY MONEY, INVESTING FOR A NEW WORLD, BUILT FOR THESE TIMES, the iShares Core Graphic, CoRI and the CoRI logo are trademarks of BlackRock, Inc. or its affiliates. All other trademarks are those of their respective owners.
MKTGM0721U/S-1715297
Estimated reading time: 2 min
Due to the potential for losses, the Financial Conduct Authority (FCA) considers this investment to be high risk.
What are the key risks?
1. You could lose all the money you invest
• If the business you invest in fails, you are likely to lose 100% of the money you invested. Most start-up businesses fail.
2. You are unlikely to be protected if something goes wrong
• Protection from the Financial Services Compensation Scheme (FSCS), in relation to claims against failed regulated firms, does not cover poor investment performance. Try the FSCS investment protection checker here to find out more.
• Protection from the Financial Ombudsman Service (FOS) does not cover poor investment performance. If you have a complaint against an FCA-regulated firm, FOS may be able to consider it. Learn more about FOS protection here .
3. You won’t get your money back quickly
• Even if the business you invest in is successful, it may take several years to get your money back. You are unlikely to be able to sell your investment early.
• The most likely way to get your money back is if the business is bought by another business or lists its shares on an exchange such as the London Stock Exchange. These events are not common.
• If you are investing in a start-up business, you should not expect to get your money back through dividends. Start-up businesses rarely pay these.
4. Don’t put all your eggs in one basket
• Putting all your money into a single business or type of investment for example, is risky. Spreading your money across different investments makes you less dependent on any one to do well.
• A good rule of thumb is not to invest more than 10% of your money in high-risk investments .
5. The value of your investment can be reduced
• The percentage of the business that you own will decrease if the business issues more shares. This could mean that the value of your investment reduces, depending on how much the business grows. Most start-up businesses issue multiple rounds of shares.
• These new shares could have additional rights that your shares don’t have, such as the right to receive a fixed dividend, which could further reduce your chances of getting a return on your investment.
If you are interested in learning more about how to protect yourself, visit the FCA’s website here .
What is an alternative investment?
An alternative investment is any investment that falls outside the traditional areas of cash, bonds and stocks.
Alternative investments generally have a low level of correlation with traditional investments (stocks, bonds, and cash). Diversifying into alternatives may reduce your exposure to wider market conditions. Some alternative investments, such as EIS, also include significant tax incentives.
Investing in alternative assets often necessitates a particularly high level of analysis as it can be difficult to determine their current market value. Think, for example, the level of expertise needed to know which work of art is most likely to appreciate in value over the years.
It's up to you which, if any, alternatives you decide to include in your portfolio. Though we highly recommend speaking to your financial advisor before you consider them. The good news is that the range of options available to investors has increased substantially over the years.
Click the icons below to view more on each alternative investment type
Tax-Efficient
Investments incentivised by reductions in tax liability.
Collectibles
Unique items that can increase in value over time: art, antiques, jewellery.
Derivatives
Contracts based on speculation on the changing value of an asset: options, futures, swaps.
Crowdfunding
A project or venture funded by small donations from many people.
Real Estate
Investments in property and land, including REITs.
Private Equity
Investments that aren't publicly traded.
Hedge Funds
More complex investments for high net worth and sophisticated investors.
Commodities & Currency
Materials & natural resources, metals, foodstuffs and others; Forex and cryptocurrency.
If you'd prefer to find out more about our own EIS fund , just click the button below.
Alternative investments, a risky business?
There are, of course, people who don’t believe alternatives belong in a portfolio. One of these naysayers is George Papadopoulos, a wealth manager at Novi. George cites a lack of liquidity and transparency in his reasoning – a point that does hold true for certain alternatives. Other sources, including Baird & Co's research as cited by the Wall Street Journal , indicates that including them in your portfolio can increase the likelihood of generating returns.
As with any investment, you need to be fastidious in your due diligence prior to committing your cash to an alternative. Take a deep look at the investment requirements and ensure that your portfolio can accommodate the potential risk and longer-term holding positions that may be required. Remember that historical performance is not an indication of future returns, and seek the guidance of your financial adviser where necessary.
Get your free guide to EIS
Want more information on UK investing?
Download your copy of our free guide. Featuring an analysis of UK investor trends, investment case studies and an EIS cheat sheet.
Get your free guide
Introduction to Alternative Investments
An Introduction to Private Equity Secondaries
Secondaries consist of private markets investments that transact in the secondary market. They have evolved into a diversified $130-billion-a-year market.
An Introduction To The World Of Structured Solutions
Structured notes are debt securities that feature an exposure to an underlying asset class, such as equities, currencies or commodities.
Structured Solutions Alternative Investments Advisor Insights
What are the Alternatives?
Alternative assets fall outside traditional equity and bonds. Alt investments almost tripled over the last decade and could grow to over $23.2 trillion by 2026.
Alternative Investments Hedge Funds Private Markets
Giving Credit to Private Debt
Private debt (or private credit) refers to loans that are privately negotiated between two parties as opposed to traditional syndicated loans or bonds issues.
Alternative Investments Private Markets
The Real Thing
Real estate is tangible property consisting of land, buildings and related structures. Assets under management (AUM) grew to $1.3 trillion at the end of 2021.
Private Equity is No Longer a Secret
Private equity is investing in a privately owned company rather than owning shares in a public company. It is the largest alternative asset class.
Seeking to Invest in the Real Economy
Real assets are physical assets that include infrastructure and natural resources and can also include real estate.
Beyond Hedging
Hedge funds are private, actively managed, pooled investment vehicles. They reached $4.3 trillion in 2021 and could grow to over $5 trillion by 2026.
Alternative Investments Hedge Funds
A Beginner's Guide to Alternative Investments
Interest in nontraditional markets continues to grow.
A Guide to Alternative Investments
Investors who want exposure to alternative assets seek investments outside of the traditional markets of stocks, fixed income or cash. (Getty Images)
After a volatile 2020 in traditional stock and bond markets, interest in alternative investments is growing.
That said, alternative investments are not for everyone. Access is limited to high-net-worth individuals and entities who are allowed to invest in securities that are not always registered with financial regulators. These investors usually fall into two groups: accredited investors and qualified purchasers.
Accredited investors must have an individual income exceeding $200,000 – or $300,000 for joint income – for the last two years and expect their earnings to continue at that level, or have an individual or joint net worth exceeding $1 million. Qualified investors have an investment portfolio of $5 million or more, individually or jointly. These people are considered to be sophisticated investors or have access to sophisticated information or advisors.
In October, the U.S. Securities and Exchange Commission expanded those definitions to also include specific educational requirements for people who work in the finance industry, says Keith Black, managing director of content strategy for CAIA Association, which offers investment professionals certification in alternative investments.
For example, Black says fund managers who might not meet the income or asset requirements can invest in their own funds. Financial professionals who pass certain exams from the Financial Industry Regulatory Authority, the government-authorized organization that oversees U.S. broker-dealers, also qualify.
What Are Alternative Investments?
Investors who want exposure to alternative assets seek investments outside of the traditional markets of stocks, fixed income or cash. The goal is to create portfolio diversification and to enhance returns, Black says. Historically, some alternative investments such as private equity or venture capital have had returns above public equity markets, he says.
Investing in alternative assets often requires buyers to lock up their money for five, maybe 10 years, says Joe McLean, managing partner of multifamily office Intersect Capital. During that time, investors may not see any money distributed. Liquidity is also an issue as fund managers can't easily buy or sell holdings like managers in traditional markets, so investors can't easily tap those assets when they want.
Many types of alternative asset classes aren't correlated with stocks and are expected to perform best when equity returns are flat or down, Black says. Here are some common alternative investment types:
- Private equity.
- Venture capital.
- Private debt.
- Hedge funds.
- Real estate.
- Commodities.
Private Equity
Private equity invests in non-publicly traded companies. Investors' money can be unavailable for as long as 10 years as they wait for the private equity fund to sell the holdings in an initial public offering or sell to a strategic buyer or in a merger, Black says.
Transparency is an issue, as buyers often commit to investing in a blind pool and won't know what the company is until the manager finds the investment.
Venture Capital
Venture capital is a sub-category of private equity. It invests in early stage companies that have the potential for outsize growth, or are looking to expand rapidly in a new or innovative space. There's a high chance for failure since many of these companies may not have revenues or profits yet, but there's also high reward if a firm succeeds.
Private equity and venture capital may require investors to make capital calls, McLean says.
An investor may commit $200,000 to a fund, but the managers take money in $50,000 tranches over two years. If investors don't have the earmarked funds available when the manager needs it, they can pay enormous penalties.
"You have to be prepared to have that built into your financial plan as if you've already invested the entire amount," he says.
Private Debt
Just as some companies tap private equity for funding, some also look to private lenders, says Michael Harris, director of family office and partner with Verdence Capital Advisors. Private debt, sometimes called private credit, is also an opportunity for investors to possibly get higher yields compared to what's available in public markets.
There are different types of private debt, including mezzanine and senior debt, considered to be higher on the payout structure in cases of default and considered less risky. Distressed credit is considered riskier since it invests in debt of companies under stress.
Hedge Funds
Many strategies around hedge funds attempt to offer some sort of return and to be a buffer when traditional assets fall. Harris notes there are 16 common types of hedge-fund strategies. One common strategy is long-short equity. Managers will invest in a company that has the potential to appreciate, but they may also sell short , or bet against the company and would profit if the value goes down. Hedge funds may use absolute return strategies, also known as "all-weather strategies," investing in many different asset classes and strategies to generate returns no matter what traditional markets are doing.
A third common strategy is market neutral, Harris says. In addition to having more of a 50/50 long-short exposure in the portfolio, market neutral funds also attempt to reduce systematic risk created by factors such as exposures to sectors, market-cap ranges, investment styles, currencies or countries.
Real Estate
Real estate is considered an alternative asset when people buy investment property such as office buildings or residential apartments, says Sal Bruno, managing director and chief investment officer for IndexIQ, an exchange-traded fund provider with alternative asset ETFs. Investors who may not want to be landlords can use a broker to buy into private real estate investment trusts , or REITs. Publicly traded REITs are listed on stock exchanges.
"The public real estate investment trusts have some characteristics of real estate, but oftentimes are considered to be very equity-oriented," Bruno says. That's because they are traded on exchanges.
Harris says other private real estate investments include timberland and farmland.
Commodities
Commodities are mostly natural resource investments, such as crude oil, corn and coffee. Being real assets, they are often considered an inflation hedge .
Commodity trades are implemented in the futures market , Bruno says, and have set times during the year when contracts mature.
Investors need to sell the contract ahead of maturity and buy a new one to hold the position. Sometimes the new contract is more expensive than the old contract, which can be a drag on performance.
"These roll issues are well documented," he says.
Some commodity markets are also available through ETFs, such as gold or oil.
Regulation of Alternative Investments
"Everyone in the market has the same rules: do not lie, do not cheat and do not steal, so they're completely regulated in that way," Black says.
But alternative investors differ from public markets, such as stocks, bonds and mutual funds, in key ways. Publicly traded investments fall under the 1940 Investment Act, which regulates investment funds. Two sections of that act describe accredited investors and qualified purchasers under private-placement exemptions. If a fund manager promises to only sell their fund to accredited and qualified purchasers, that's a private-placement exemption from the act, so the rules don't apply to that fund, Black says.
This exemption allows fund managers to use a maximum level of leverage or be very illiquid, and they don't have to report a daily net asset value, regular holdings reports or a prospectus, for example. There's not necessarily full disclosure, and that's part of the point of these investments. These managers can cloak what they do, he says.
What investors receive in lieu of a prospectus is a private-placement memorandum of understanding, which dictates the fees, liquidity and the type of investment. "If you tell your investors that you're a commodity fund, the SEC wants you to be a commodity fund. They don't want it buying real estate," Black says. "They have to follow the terms of those documents."
Investors may get monthly or quarterly data, but it is often delayed. Black says as of early January, hedge-fund returns are current as of November and private-equity returns are current as of June.
Pros and Cons of Alternative Investments
Like any other investment, alternative investments come with pros and cons:
Pro: Diversification. Harris says the two big reasons to include alternative investments, portfolio diversification and to enhance returns, must be considered carefully. Alternative investments should have low correlation to traditional markets, but that doesn't mean negative correlation, he says, which is a common mistake.
"Lowly correlated means, on the spectrum of a plus one to a negative one correlation, those funds are trying to get as close to zero as possible. It means that sometimes they're going to move with traditional assets. And sometimes they will move in the opposite direction," he says. "It's not a promise that those alternative investments will always perform well when markets go down."
Con: Long lock-ups. While alternative investments like private equity can enhance returns, it can mean locking up your investment money for 10 years, and that's why investors need to seriously consider how much of a return premium they may get over the liquid public markets, Harris says.
Pro: Exposure to unique investments. Alternative investments allow people to access markets they won't be able to otherwise access such as land or being an early investor in a startup fund, which can pay big returns for patient investors.
Con: Complexity. These are very complex investments that take serious due diligence. Professional investors such as Harris will spend a great deal of time researching strategies and interviewing managers. "The difference between the top quartile managers … and the bottom quartile is huge. In some cases, it can be 15 to 20 percentage points in a given year," he says.
The Takeaway
Fees can be high, McLean says. Historically, most alternative investments have an upfront fee of 2% annually and when the fund distributes the money, managers take 20% of the gains.
"If you're going to be paying those excessive fees, which is what I would consider them, make sure that there's a track record that shows the fund is outperforming the fees," he says.
McLean says most people access alternative assets through an institution or their financial advisor, but newer digital platforms are starting to offer ways to buy directly. He says for new buyers it's still best to invest with a professional who understands the asset class, its benefits and challenges.
"Liquid alts" are growing in popularity, Black says, such as mutual funds and ETFs that offer exposure to alternative investments. These regulated securities are available to anyone and offer daily liquidity, a prospectus and show their holdings. It's not the same as direct alternative-asset ownership because of the restrictions placed on regulated securities such as limits on leverage and diversification. These can be an introduction to the space, but the expense ratios can be higher than traditional market vehicles without being much more diversified.
Although alternative investments aren't transparent, investors can still benchmark their fund's performance, Black says. Investors wouldn't use a traditional benchmark like the S&P 500 . Instead, look for a benchmark similar to the strategy.
"There are a wide variety of private market and alternative indices," he says. "There are indexes tracking different hedge-fund styles, different real estate styles, different private equity styles – they all have their own benchmarks."
7 Ways to Invest for Income
Tags: hedge funds , investing , real estate , REITs , commodities
Compare Offers
Ad disclosure
Are you a Financial Advisor?
Expand your practice with insights from U.S. News
The Most Important Ages for Retirement Planning
Comparative assessments and other editorial opinions are those of U.S. News and have not been previously reviewed, approved or endorsed by any other entities, such as banks, credit card issuers or travel companies. The content on this page is accurate as of the posting date; however, some of our partner offers may have expired.
Recommended Articles
Subscribe to our daily newsletter to get investing advice, rankings and stock market news.
See a newsletter example .
You May Also Like
12 terms every investor needs to know.
John Divine July 22, 2022
10 Best Robo Advisors of 2022
Coryanne Hicks July 12, 2022
How to Invest in Commodities
Paulina Likos April 29, 2022
How to Invest for Your Kids
Paulina Likos March 25, 2022
How to Buy IPO Stock at Its Offer Price
Paulina Likos Jan. 3, 2022
8 Best Investment Apps for Millennials
Paulina Likos and Coryanne Hicks Dec. 1, 2021
Should You Invest in Gold?
Paulina Likos Nov. 5, 2021
How Earnings Affect Stock Prices
Paulina Likos Oct. 15, 2021
Private Markets: Opportunities and Risks
Paulina Likos Sept. 29, 2021
How to Prepare for a Market Correction
Paulina Likos Sept. 24, 2021
How to Cash In on Premarket Trading
Paulina Likos Sept. 21, 2021
Guide to Custodial Brokerage Accounts
Paulina Likos Sept. 14, 2021
Are Brokerage Accounts Taxed?
Coryanne Hicks Aug. 9, 2021
Economies of Scale 101
Henry Hilker Aug. 5, 2021
An Investor's Guide to Options Trading
Paulina Likos Aug. 4, 2021
How to Invest in Startups
Paulina Likos July 23, 2021
Understanding a Balance Sheet
Matt Whittaker July 20, 2021
How to Invest Using Sector Rotation
Paulina Likos June 16, 2021
What to Know Before You Invest in Gold
Paulina Likos and Miranda Marquit May 25, 2021
The Ultimate Guide to Brokerage Fees
Coryanne Hicks and Paulina Likos May 24, 2021
Alternative Investment
An investment in assets different from cash, stocks, and bonds
What is an Alternative Investment?
An alternative investment is an investment in assets different from cash, stocks, and bonds. Alternative investments can be investments in tangible assets such as precious metals or wine. In addition, they can be investments in financial assets such as private equity, distressed securities, and hedge funds .
Generally, alternative investments tend to show a low correlation with traditional investments (stocks, bonds ). In addition, some alternative investments come with extremely complicated valuation and are highly illiquid. Due to such reasons, certain types of alternative investments are quite popular among financial institutions and high net worth individuals.
Alternative investments may be a great addition to an investor’s portfolio. Many alternative investments provide significantly greater returns relative to traditional investments. Also, the availability of a wide range of alternative investments makes them a viable option despite the investor’s risk tolerance or perceptions of the market.
Features of Alternative Investments
Almost all alternative investments come with the following features that distinguish them from traditional forms of investment:
1. Low correlation with the traditional investments
This may be extremely beneficial to potential investors because the low correlation provides opportunities for portfolio diversification.
2. Hard to determine the underlying value
Alternative investments are often inherently complicated when it comes to valuation. The valuation of an alternative investment may require specific knowledge, and some exotic investments, such as fine art, may show unpredictable demand patterns. In addition, they may be unique in their nature, which also complicates the valuation.
3. Relatively low liquidity
Generally, alternative investments possess relatively low liquidity, especially compared to traditional investments. The low liquidity can be explained by the absence of centralized markets and the low demand for some of the assets relative to traditional investments (think about works of contemporary art). In addition, some of the investments come with restrictions regarding exiting from the investment.
4. High purchasing costs
Alternative investments are frequently associated with high purchasing costs. Some alternative investments such as hedge funds require a minimum investment amount, as well as a fee.
Classification of Alternative Investments
Alternative investments may be classified as tangible or intangible investments.
Tangible alternative investments include the following:
- Precious metals
Examples of intangible alternative investments include:
- Hedge funds
- Private equity
- Venture capital
- Derivatives
- Cryptocurrency
Additional Resources
Thank you for reading CFI’s guide on Alternative Investment. To keep learning and advancing your career, the following CFI resources will be helpful:
- Investing: A Beginner’s Guide
- Marketable Securities
- Service Charge
- Types of Assets
- See all wealth management resources
- Share this article
- How it Works
- Getting Started
- Compare Percent
- Our Asset Classes
- Blended Notes
- Venture Investing
- Asset-Based Financing Learn all about raising capital with Percent asset-backed deals.
- Corporate Loans Scale your company with corporate loans in between your fundraising rounds.
- Underwriter
- Our Performance
- In the News
An Introduction to Alternative Investments
This article is the first part of a series on alternative investments.
While stocks and bonds come most readily to mind, there are many more types of investments available to individuals and institutions. These ‘alternative’ investments (so-called because they are not traditional equities or fixed-income securities) are numerous and have existed for decades.
As investors seek for ways to diversify holdings, find income, and grow wealth, their interest in alternative investments has grown steadily. In this article, we look at three different categories of investments: traditional, alternative, and hybrid (or non-traditional).
Traditional Investments, Defined
Traditional investments include publicly-traded stocks and fixed-income securities (government and corporate bonds). These assets are regularly traded and sufficiently liquid, enabling an investor to quickly and easily find a market-clearing price to enter or exit the investment.
The liquidity of traditional asset markets is reflected by very narrow bid-ask spreads and low (or, in some cases, no) commissions. In addition to being easily bought and sold, traditional assets like stocks and bonds have a long price history that is generally available, reliable, and trusted. In addition, diversified portfolios consisting of publicly-traded stocks and fixed-income securities, often mimicking various indices, are readily available in the form of mutual funds and exchange-traded funds (ETFs).
Alternative Investments, Defined
Alternative investments are infrequently traded and are not found on public markets such as an exchange. As a result, they are often illiquid, not easily valued, and difficult to price. Alternative investments cover a broad range of assets, from private credit or equity funds to bespoke private investments, and even unique objects or so-called ‘passion’ assets.
However, investor interest is starting to drive change in alternatives:
- Private credit and private equity funds increasingly have historical data performance available, particularly for funds managed by some of the larger and better-known private equity companies.
- Bespoke private investments in the equity and credit of smaller growth companies are becoming increasingly popular as investors seek value. In some cases, the ability to compare basic investment parameters is emerging.
- ‘Passion’ assets can include art, stamps, sports memorabilia, vintage cars, and fine wine – and even items that are one-of-a-kind such as original artwork. Some artwork, music, and similar bespoke assets have recently started to be digitized and sold via the blockchain in the form of non-fungible tokens (NTFs).
Select cryptocurrencies and NFTs can be characterized as alternative assets, noting that these assets do not have a recognized basis for consistently determining a price. A few of the most recognized cryptocurrencies like Bitcoin and Ethereum do offer liquidity, although price swings are unpredictable and at times extreme. Given wide variation in price transparency and liquidity in this evolving asset class, the case for characterizing cryptocurrencies and NFTs as alternative assets can be made for now – but is subject to change in the future.
Hybrid (Non-Traditional) Investments, Defined
A third category of assets shares attributes of both traditional and alternative asset classes. Hybrid, or non-traditional, investments include assets like real estate, precious metals, and commodities. While often grouped under the alternative investment umbrella, they have some significant differences.
Take real estate. One could argue that every piece of land, house, or office building is unique and will be priced for its specific attributes such as size and location. Although this would meet some of the parameters of an alternative asset, there is nonetheless a general market for real estate in a particular city or region, along with well-defined and readily available price/square foot data for each property type. Similarly, precious metals and most other commodities might have some quality or purity differences but, generally, can be easily traded at prices which are visible on various exchanges or markets.
Comparing Asset Attributes
When moving from traditional to hybrid/non-traditional to alternative asset classes, there are noticeable differences in price transparency, bid-ask spreads, commissions, and liquidity as summarized in the table below.
Broadening Access to Alternative Investments
The Percent platform was designed to give accredited investors exclusive access to private credit investments . Private credit is an asset class of privately negotiated loans and debt financing from non-bank lenders. By definition, these are alternative investments.
Investing in this asset class gives investors exposure to small business and consumer loans, venture debt, and other forms of private credit. Attractive given their higher yields and largely uncorrelated performance vis-à-vis the public markets, these investments have historically been difficult for individual accredited investors to access.
Percent’s mission is to make private credit markets more transparent and accessible, benefiting all market participants. Percent provides investors with clear deal terms upfront, visibility into the underlying financials of the borrowers, and the ability to compare different types of transactions before investing. The duration and yield of Percent’s structured, securitized deals are established from the start so investors know what to expect in terms of returns and when. While the deals aren’t traded on a secondary market, the duration of a Percent note averages 9 months with refinancing or calls in as little as one month. This allows investors to redeploy their capital frequently to stay flexible in dynamic markets and achieve their investment objectives.
Part two of this series explores asset correlation in greater detail. Read Alternative Investments and Asset Correlation.
About The Author
Sign up and make your first investment.
Our diverse set of investment offerings target annualized returns of up to 20%.
IMAGES
VIDEO
COMMENTS
While trading stocks is a familiar concept to many, the more complex world of options trading exists in some obscurity to the average person. Given that it is a good way to hedge a portfolio, more and more investors want to learn about opti...
It’s always nice to be able to align your investments with companies that share your values. But things can still get a bit complicated for investors who are looking to put their money into alternative energy.
There are typically two ways to earn money. The first is through a job earning a wage. The second is through investing. But why is investing so important? Investing can help fund your retirement, earn a passive income, and build your net wo...
Alternative investments are supplemental strategies to traditional long-only positions in stocks, bonds, and cash. · Alternative investment strategies are
An alternative investment is a financial asset that's not stocks, bonds, or cash. These types of investments are typically illiquid—meaning they
An alternative investment is a financial asset that does not fit into the conventional equity/income/cash categories. · Private equity or venture capital, hedge
Alternatives are becoming core to investor portfolios. BlackRock offers alternative solutions, such as credit, private equity, real assets and hedge funds.
An alternative investment is any investment that falls outside the traditional areas of cash, bonds and stocks. Alternative investments generally have a low
Alternative assets fall outside traditional equity and bonds. Alt investments almost tripled over the last decade and could grow to over $23.2 trillion by
Investors who want exposure to alternative assets seek investments outside of the traditional markets of stocks, fixed income or cash. The goal
In its broadest definition, alternative investment assets are those which are not part of traditional asset classes such as cash, stocks, or bonds that retail
An alternative investment is an investment in assets different from cash, stocks, and bonds. Alternative investments can be investments in
Traditional investments include publicly-traded stocks and fixed-income securities (government and corporate bonds). These assets are regularly
1. Introduction & Los 58 A | Alternative Investment | CFA L-1 · 2017 Level I CFA ALT: Alternative Investments - Summary · 6 Pitfalls To Avoid In