A Study of Allocations to Alternative Investments by Institutions and Financial Advisors

Key Insights

• 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.