Alternative Investments and Their Roles in Multi-Asset Class Portfolios

Key Insights

• The term "alternative investment" generally applies to an array of investment types that are distinct from traditional portfolio holdings, such as stocks, bonds, and cash. Categories of alternatives include hedge fund strategies, private equity, private credit, real assets, and digital assets.
• Alternative investment strategies were at one time largely available only to institutional investors, but asset managers have accelerated their efforts to develop innovative investment vehicle structures (some in the form of mutual funds and exchange-traded funds) that provide broader access to the potential return, risk, and diversification benefits of alternatives.
• We studied the historical investment characteristics of 16 traditional and alternative investment categories from 2005 through 2021, and we ranked them based on three key metrics: annualized returns, performance amid poor public equity market returns, and diversification benefits.
• Among the alternatives we studied, private equity, private credit, and private real estate (a real asset) demonstrated higher returns than most other asset categories over the period; the returns of private equity, direct lending (within private credit), private real estate, and hedge fund strategies held up relatively well amid poor public equity performance; and hedge fund strategies, private real estate, and late-stage venture capital (within private equity) offered enhanced portfolio diversification.
• In a multi-asset class context, we found that expanding the investment opportunity set to include alternative investments may enhance risk-adjusted returns relative to a universe composed only of traditional asset classes.