Investing Ideas

A study of allocations to alternative investments by institutions and financial advisors

Proprietary research from Fidelity explores emerging trends by segment, and strategies where investors may be under- or over-allocated to alternatives.

By: Darby Nielson Emil Iantchev Hongshu Chen Dennis Bowden Samantha Faille
Updated: 6/23/2023
Key Takeaways
  • Many institutions and advisors have acknowledged that alternative investments, including hedge fund strategies, private equity, private credit, and real assets, may help enhance returns, manage risk, or improve diversification, among other potential benefits.
  • Institutions have historically held higher average allocations to alternatives than advisors (23% vs. 6%),1 given barriers to entry such as manager access, perceived costs, liquidity considerations, and high investment minimums. Such hurdles reflect long-standing transactional frictions that have likely hindered investor implementation in the past.
  • Based on surveys conducted on behalf of Fidelity, we have compiled insights into the portfolio allocations of institutions and financial advisors to better understand how they are using alternative investments within their multi-asset portfolios.
  • We also employed quantitative techniques to learn more about the return assumptions implied by these allocations, and what those holdings might suggest about possible under- or over-allocations when compared to the investment expectations of the broader institutional investment universe.2
  • Lower allocations and lower corresponding implied real returns for private assets (by the broader market relative to institutions) suggest investments could flow from developed equity and bond markets into private markets, as investors gain a better understanding of perceived and real hurdles.
  • Relative to stated return expectations, institutions across the board demonstrated under-allocation to private credit, but over-allocation to real estate and commodity strategies. Years of low interest rates may have influenced return expectations for private credit relative to private equity, and tilted allocations in the direction of private equity; the focus on real assets is likely due to inflation concerns.
  • The reduction of legacy transactional frictions and emergence of new vehicles and platform technology could help encourage optimal allocations along the efficient frontier and thereby help improve overall client outcomes.
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1. Sources: 2022 Fidelity Institutional Investor Innovation Study, May 2022 (institutions); October/November 2021 Fidelity Advisor Insights Survey; and The Cerulli Report—U.S. Alternative Investments 2022: Delivering Alternative Capabilities to Retail Investors (advisors). Market based on total assets and related metrics compiled in global indices, November 2022. Note: The summary above features data from several surveys; liquid and illiquid data usage do not sum. This analysis does not include digital assets, which Fidelity views as a type of alternative investment, given their shorter track records.

2. Survey of Capital Market Assumptions, 2022 Edition, Horizon Actuarial Services LLC. Annual survey of 40 investment advisors featuring their expected return assumptions.

Diversification and asset allocation do not ensure a profit or guarantee against loss.

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