Alternative Investments – Expanding Solutions
Alternative investments encompass financial assets beyond traditional stocks, bonds, and cash. This diverse sector includes private equity, hedge funds, venture capital, private credit, real estate, infrastructure, commodities, and digital assets. While these investments were historically exclusive to institutional and accredited investors, individual investors now have access to the alternative strategies such as long/short, macro, multi-strategy and others through hedge funds.
Alternative strategies aim to generate alpha and enhance portfolio diversification, each offering distinct benefits and risks. Their popularity has grown significantly in recent decades due to increased market volatility and a rising demand for non-correlated returns. Innovations like tokenization and regulatory developments such as ELTIF 2.0 have further broadened access, allowing a wider range of investors to participate.
Key Differences Between Alternative and Conventional Investments
Why is alternative investing becoming more relevant in today’s climate?
Alternative investments are becoming increasingly vital amid modest traditional returns and ongoing market volatility, offering both diversification and enhanced performance. Today’s backdrop of higher volatility and wider dispersion is conducive to alpha generation, marked by the rising correlations between equities and fixed income and heightened geopolitical and economic uncertainty. The table below from Goldman Sachs Asset Management, uses the example of a hedge fund to discuss how the new regime is more supportive of alternative investments:
Source: Goldman Sachs Asset Management, data as of 30 Jun 2024.
Between 2009 and 2021, the QE era fostered low volatility, benefiting high equity beta assets. Equities delivered strong returns, while fixed income served as an effective hedge against market fluctuations. This made hedge fund performance less attractive, steering investors toward conventional investments.
However, since 2022, the emergence of a higher-rate, more volatile, and inflationary environment has disrupted high equity beta trades and traditional fixed-income hedges, driven by rising equity-bond correlations. As a result, hedge funds have gained prominence, delivering alpha and diversification beyond conventional assets. The broader market dispersion has created greater trading opportunities, leading hedge funds to outperform traditional 60/40 portfolios with improved risk-adjusted returns.
Source: J.P. Morgan Asset Management, data as of 28 Feb 2025.
As shown in the graph above, the traditional 60:40 equity / bond portfolios may no longer be sufficient to meet future investment goals, as challenges in public markets persist. To better manage volatility and enhance overall returns, investors should consider alternative assets as sources of alpha, income, and diversification. Over time, a well-structured allocation to alternatives has shown the potential to improve the risk/return profile of a portfolio, offering a more resilient strategy across varying market conditions.
Key Takeaways
When choosing among the many alternative investment options, it's essential to align each strategy with your specific financial goals—whether you're seeking higher returns (alpha), greater income, or diversification from traditional markets. For instance, core real estate or private credit may suit income-focused investors, while hedge funds might appeal to those looking to reduce market volatility. Each option offers unique benefits and distinct risks. Understanding these trade-offs is key to selecting the right blend of alternative assets that complements your overall portfolio and time horizon. By identifying the right alternative strategies, investors can enhance portfolio diversification, capitalize on alpha opportunities, and navigate today's dynamic financial environment more effectively.
This report has been prepared for the purpose of providing general information only without taking account of any particular investor’s objectives, financial situation, or needs, and does not amount to an investment recommendation. In all cases, the information in this document does not constitute a solicitation for investment. You should always bear in mind that the value of investments and any income from them may go up as well as down, and past performance should not be seen as an indication of future performance.