What are alternative investments?
By José Villalta
When we talk about investing, one of the first things that comes to mind is the stock market. But the investing world is far broader. The traditional asset classes are publicly traded equities, such as stocks, and fixed-income instruments, such as corporate and sovereign bonds. There is another class known as alternative investments, which includes private credit, private equity, venture capital, hedge funds, real estate, infrastructure, and natural resources.
The advantages, and their cost
According to the CFA curriculum, alternative investments offer certain advantages over traditional ones — primarily their low correlation to public equity and fixed-income markets, which improves a portfolio’s diversification. Another is their higher expected returns. But these advantages come at a cost.
Alternative investments are usually illiquid. Real estate can take weeks or even months to sell, and vehicles like hedge funds, venture capital, and private equity carry long lock-up periods and limited redemption options. Managing these assets requires specific skills and knowledge, so management fees tend to be higher and the instruments often include an incentive structure for the manager.
How the largest investors use them
As Bob and Ben Fraser note in their book “Invest Like a Billionaire,” ultra-high-net-worth investors allocate roughly 50–60% of their portfolios to alternative investments. The reason is their low exposure to market volatility and their access to long-term value creation.
The Yale Endowment is another example, through the Yale Endowment Model. Its philosophy holds that long-term investors should prioritize assets that are less efficient and less liquid, because private markets offer greater opportunities to generate value over time.
Although alternative investments may seem reserved for sophisticated investors, at Lagering Capital we assess and give our clients access to the private markets. If this asset class appeals to you, or you would like advice on these kinds of vehicles, please reach out.
