Alternative investments, often simply called “alternatives,” is an umbrella term so broad that investors often find it confusing. What does it mean — and how should investors think about them as an addition to their portfolios? As alternatives continue to expand in usage and access, aided by new product structures and platforms that broaden investor reach, understanding the universe of alternatives is an essential foundation for modern investors.
Key Takeaways: Why Alternative Investments?
Diversification
Alternatives have historically tended to have low correlation to traditional assets, helping reduce portfolio volatility and offering varied risk-return exposures.
Access to the private economy
Alternatives provide exposure to companies and assets not available in public markets, adding unique return drivers.
Potential return premium
Alternatives may offer an illiquidity premium and rely on active management to enhance long-term return potential.
The Basics: How Alternatives Differ From Traditional Investments
Asset Class Breakdown
Private markets span six distinct sub-asset classes, each with unique risk drivers and portfolio roles.
Public Markets
- Public Equity
- Fixed Income
- Cash / Money Markets
- Listed REITs
Private Markets
- Private Equity
- Private Credit
- Infrastructure
- Venture Capital
- Private Real Estate
- Natural Resources
Other Alternatives
- Hedge Funds
- Commodities
- Structured Products
- Digital Assets
Key Insight: Private markets include more sub-asset classes than public markets, giving investors greater flexibility to target specific risk factors, sectors, and return profiles.
The alternatives landscape is not a single asset class — it's a broad and heterogeneous family of investment types, each with distinct mechanics, risk profiles, and strategic roles in a portfolio.
The simplest way to think about alternatives is to start with what most people know: the traditional investment world is public. This means that publicly offered securities can be bought and sold by anyone on open exchanges such as the NYSE or NASDAQ or, in the case of bonds, over-the-counter directly between parties. You can open a brokerage account today and buy a share of a public company share (like Apple) or a U.S. Treasury bond in seconds. Prices are transparent, markets are liquid, and regulation is robust.
Conversely, alternatives are mostly private. They are mostly not listed on public exchanges.1 Although this has changed in recent years, historically they often required more specialized access and, in certain cases, can require longer investment time commitments and deeper due diligence. In return, they offer exposure to a much broader universe of assets — from private companies and real estate to infrastructure, commodities, hedge funds, and beyond.
The word "alternative" doesn't always mean risky or exotic. It simply means alternative to the public markets. Many of the world's most durable, income-producing assets — toll roads, apartment buildings, private businesses — have long lived in this space.
The word "alternative" doesn't always mean risky or exotic. It simply means alternative to the public markets. Many of the world's most durable, income-producing assets — toll roads, apartment buildings, private businesses — have long lived in this space.
Exhibit 1: Alternative Investments Compared to Traditional Investments
| Attribute | Alternatives | Traditional Investments |
|---|---|---|
| Liquidity | Limited or periodic; lock-ups common, with exceptions for evergreen vehicles that may have some level of liquidity | Daily (public markets) |
| Fees | Management plus sometimes incentive/performance fees | Depends on the type of security and method it is distributed |
| Valuation transparency | Appraisal/model-based; monthly-quarterly | Market-priced; continuous |
| Reporting cadence | Quarterly/semi-annual | Daily/monthly/annual |
| Regulation | Regulated | Highly regulated (e.g., ’40 Act funds) |
| Use of leverage/derivatives | Strategy-dependent, often material | Limited in open-ended mutual funds |
| Transferability | Sponsor consent needed/common restrictions | Freely tradable on exchanges (public) |
Note: (Illustrative – characteristics of specific investments may vary significantly)
How do alternatives typically behave?
To paint with broad strokes, alternatives generally have low liquidity — meaning that they cannot be traded readily at short notice, so capital is locked up for the long term — and can be more complex than traditional investments. As such, asset selection, valuation and investment management often require specialist knowledge. Some alternatives are investments in tangible assets, such as infrastructure and real estate; others are in financial assets, such as shares in, or loans to, private companies.
Exhibit 2: Alternative Asset Classes and Their Typical Attributes
| ASSET CLASS | WHAT IT IS | COMMON EXAMPLES | RETURN DRIVERS | TYPICAL RISK | LIQUIDITY |
|---|---|---|---|---|---|
| Private Equity | Ownership stakes in private companies | Buyouts, venture capital, growth equity | Earnings growth, multiple expansion, operational improvement | Medium–High | Low (typically 5–10 years) |
| Private Credit | Private loans made directly to companies by non-bank lenders | Direct lending, mezzanine debt, distressed credit | Base rate + credit spread, illiquidity premium | Medium | Low–Medium |
| Asset-Based Finance (ABF) | Private credit backed by diversified pools of hard or financial assets | Consumer loans, equipment leases, receivables, aircraft finance, mortgages, royalty streams, infrastructure-backed lending | Contractual cash flows from underlying assets, yield enhancement through structuring, collateral protection, amortization, and sourcing advantages | Medium | Low–Medium |
| Real Estate | Direct or indirect ownership of property, loans backed by property | Apartments, industrial warehouses, office buildings, retail centers | Rental income, property appreciation, leverage, principal and interest payments | Medium | Low–Medium |
| Infrastructure | Physical systems that power economies | Data centers, cell towers, energy pipelines | Regulated/contracted cash flows, inflation linkage | Medium | Low |
| Hedge Funds | Actively managed pools using diverse strategies | Long/short equity, macro, arbitrage | Alpha, leverage, market-neutral exposures | Medium–High | Medium |
| Commodities | Physical goods or exposure to them | Gold, oil, agricultural products | Supply/demand dynamics, inflation expectations | Medium–High | Medium–High |
| Digital Assets | Crypto tokens and blockchain-based networks | Cryptocurrencies, NFTs, stablecoins | Network adoption, tokenization, market sentiment | High | High |
| Collectibles | Tangible assets with store-of-value properties | Art, wine, vintage watches | Supply/demand, scarcity, inflation expectations | Idiosyncratic | Low |
Notice the breadth in the above. A venture capital fund backing early-stage biotech startups and a private credit fund lending to mid-size manufacturers are both "alternatives" — but they're different in many ways.
Why Invest in Alternatives?
Large institutional investors — university endowments, pension funds, sovereign wealth funds — have allocated heavily to alternatives for decades. There are a few reasons why.
The “Alternatives Market” is growing fast; new investment types and strategies continue to emerge, while the access points for investors are developing to meet the needs of an expanding base of institutional, high net worth, and retail investors. (See “What Are Evergreen Funds?”)
Exhibit 3: Size of the Alternatives Industry: 2018-2028, US$ Trillions
Diversification 2
Many alternatives don't move in lockstep with the stock market. When equity markets sell off, infrastructure assets backed by long-term contracts, or private loans with fixed repayment schedules, tend to be more insulated. This low historical correlation can be enormously valuable in a portfolio context.
Access to the Private Economy & Its Return Drivers
The number of U.S. public companies has declined dramatically since peaking in the late 1990s. Meanwhile, the private economy has grown exponentially. If you only invest in public markets, you may be missing most of the economic activity — the mid-size manufacturers, the growing tech startups, the infrastructure that powers modern life.
Return Premium
Private markets have historically compensated investors for illiquidity. Because you can't sell your stake in a private company at a moment's notice, you historically, in many instances, have received higher returns than comparable public investments. This is called the illiquidity premium.
Who Invests in Alternatives?
For most of their history, alternatives were effectively off-limits to everyday investors. High minimum investments, accreditation requirements, and structural complexity largely kept them in the hands of large institutions and the ultra-wealthy. Today, new investment structures — including evergreen vehicles and interval funds — are making alternatives increasingly accessible to individual investors.
Pension funds:
Use alternatives to meet long-dated obligations to retirees; prize income and inflation protection
University endowments:
Yale and Harvard pioneered heavy allocations to alternatives starting in the 1980s; often 50–70%. Endowments generally have a “perpetual life”, prefer growth over income and typically have higher tolerance for illiquidity.
Sovereign wealth funds:
Large pools of national capital (such as, Norway, Singapore, UAE) with multigenerational time horizons
Family offices:
Manage wealth for ultra-high-net-worth families; often early adopters of new alternative structures
High-net-worth individuals:
Accredited investors increasingly gaining access via private funds and wealth platforms
Retail investors:
Liquid alternative mutual funds, multi-asset mutual funds including private market exposure (target date, target risk funds etc) and some evergreen funds without eligibility restrictions.
The Potential Role of Alternative Investments in a Portfolio
The core rationale is diversification through complementary return streams. Low-to-moderate correlations with public markets can reduce overall portfolio volatility and smooth drawdowns (the capital that a fund manager calls from committed investor capital). Over long horizons, private markets have also demonstrated competitive outcomes; for example, a global buyout index outperformed public equities by roughly 500 basis points (5%) per year over the past decade.3 To put this into perspective, 500 bps of outperformance adds $50 million of value on every $1 billion invested. Effective implementation depends on thoughtful allocation size, pacing of commitments, manager selection and diversification, and ongoing portfolio review.
Accessing Alternative Investments: How Do Investors Access Alternatives?
The vehicle matters as much as the asset class. Different structures offer different combinations of access, liquidity, fees, and investor protections and risks.
Access routes include:
- Direct investments and co-investments alongside sponsors for concentrated exposure.
- Private funds (commingled drawdown vehicles) and evergreen structures for diversified access.
- Registered and listed options such as REITs, Business Development Companies (BDCs), interval/term funds, and liquid-alts mutual funds for improved liquidity.
- Institutional platforms and newer fintech-enabled marketplaces that broaden access and lower operational frictions
- Strategic partnerships with experienced managers.
The key takeaway: there is no one-size-fits-all approach to accessing alternatives. An everyday investor buying shares of a business development company (BDC) through their brokerage account is technically an alternatives investor — but their experience is very different from a pension fund committing $500 million to a private equity fund.
Eligibility considerations often include minimums, accredited investor or qualified purchaser status, liquidity tolerance, and fit within an investor’s objectives and risk budget. Some retirement plans have begun exploring structures that carefully incorporate private market exposures within diversified target-date frameworks and collective trusts.
| VEHICLE | WHO IT’S FOR | LIQUIDITY | MINIMUM INVESTMENT (TYPICAL) |
|---|---|---|---|
| Limited Partnership (LP) | Institutions, family offices | Illiquid (locked) | $1M–$10M+ |
| Business Development Co. (BDC) | Retail & High Net Worth (HNW) investors | Publicly traded or semi-liquid | Low (share price) |
| Interval Fund | Accredited investors | Quarterly redemption windows | $10K–$50K typical |
| Non-Traded REIT | Retail investors | Limited; periodic tender offers | $2,500–$25K typical |
| Co-Investment | Limited Partners (LPs) alongside a General Partner (GP) | Illiquid | Varies |
| Separately Managed Account | Large institutions | Negotiated | $100M+ typically |
Key Tradeoffs to Understand
Alternatives are not a free lunch. Every benefit, comes with potential trade-offs. Understanding these dynamics helps investors make more informed decisions and set appropriate expectations.
| Benefit | The Tradeoff |
|---|---|
| Higher potential returns | Capital can be locked up for years with limited ability to exit |
| Low correlation to stocks | Correlations can rise during market stress |
| Access to private markets | Transparency and regulatory oversight varies widely, with some offering transparency and others not (like crypto or collectibles) by design |
| Income and cash yield | Higher fees (sometimes but not always “2 and 20”) |
| Diversification | Greater complexity requiring more due diligence and expertise |
| Inflation protection | Valuations are infrequent and may rely on manager discretion |
Risks and Considerations in Alternative Investing
All investments carry an element of risk, and alternatives are no exception. The main risks stem from illiquidity and significant return dispersion between top-performing managers and the rest – a reflection of the specialized expertise that these investments require. Investors should also keep in mind that, because alternatives involve greater complexity, fees tend to be higher than those of traditional asset classes.
However, the spectrum of risk and return profiles within alternatives is broad, as the underlying assets in each type can vary considerably.
Illiquidity and lockups:
Many private funds involve 7–10 year lockups.
Valuation complexity:
Appraisal-based or model-driven marks can lag market reality, complicating interim performance assessment.
Fees and incentives:
Management and performance fees can be higher than those of traditional vehicles
Use of leverage and derivatives:
Certain strategies amplify risk through borrowing or short sales in the case of hedge funds
Regulatory fragmentation and reporting:
Structures and disclosures vary across jurisdictions and vehicles, increasing operational demands.
Investors now have more options than ever to participate in private markets.
The Bottom Line
Alternative investments are not niche. They represent trillions of dollars in global capital — and they're the foundation of how many of the world's most sophisticated investors construct portfolios to achieve their unique objectives.
The key to understanding alternatives is avoiding the mistake of treating them as a single, uniform category. Private equity, private credit, real estate, infrastructure, and hedge funds are distinct disciplines with different risk-return profiles, time horizons, and strategic purposes. The label "alternatives" is a classification, not a description.
Similarly, there is no single “best” way to access alternative investments — only structures that align more or less effectively with an investor’s objectives, constraints, and level of sophistication. Liquidity needs, investment horizon, check size, and tolerance for complexity all play a role in determining the right fit.
One of the most important changes in recent years to the private markets investment landscape is expanded range of vehicles available to access alternatives. From traditional limited partnerships to more flexible evergreen structures, investors now have more options than ever to participate in private markets. Understanding these vehicles is the first step. Choosing the right one — and using it appropriately within a broader portfolio — is what ultimately drives outcomes.
Frequently Asked Questions
What are alternative investments?
Alternative investments are assets that fall outside conventional categories like stocks, bonds, and cash, including private equity, hedge funds, real estate, commodities, and collectibles, each with distinct risk/return drivers.
What types of assets qualify as alternative investments?
Common categories include private equity, venture capital, private credit, hedge funds, real estate, infrastructure, commodities, digital assets, and collectibles such as art and wine.
How should returns be measured for alternative investments?
Investors typically use internal rate of return (IRR) to capture cash-flow timing, multiple on invested capital (MOIC) to measure total value creation, and Public Market Equivalent (PME) to compare private performance against a public benchmark, but there are a variety of measurements used.
Why consider alternative investments for portfolio allocation?
They can enhance diversification, reduce sensitivity to public market swings, and provide access to unique income and growth sources.
How long should investors plan to hold alternative investments?
Many private strategies require 5–10 years or longer, reflecting the time needed for value creation and the trade-off for illiquidity.
REFERENCES
1 Some limited exceptions, like liquid alternative-focused mutual funds, or an open-ended investment company that invests directly in these types of “alternative assets” are.
2 Diversification does not assure a profit and may not protect against loss in declining markets.
3 Data as of June 30, 2025. Source: Cambridge Associates, KKR Global Macro & Asset Allocation analysis.
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