Alternative Investments

Investors use alternative investments to diversify their portfolios, seek higher returns or obtain income streams that behave differently from shares and bonds.

Alternatives can be grouped into several broad categories: private markets, such as private equity, venture capital and private credit; hedge funds; real assets, such as real estate, infrastructure, timberland and farmland; commodities; and collectibles, such as art, wine and classic cars.

For example, a university endowment might invest about half of its portfolio in alternatives, including private equity funds, hedge funds and property.

Alternative investments often have characteristics that make them different from traditional investments: they can be illiquid, with long lock-up periods; more complex; less transparent; harder to value; and more expensive, with higher fees. Many are available only to professional or wealthy investors, although products giving wider access, such as listed funds and evergreen funds, are growing.

Large institutional investors have significantly increased their allocations to alternatives since the 2000s. Investors need to understand the risks, costs and liquidity limits before investing.