Alternative investment assets under management peaked at $13.7 trillion in 2021. Investment fund analyst Prequin predicts it will almost double in the next few years, reaching $23.3 trillion by 2027.
The ultra-wealthy allocate at least 50% of their assets to alternative investments. They're not alone.
More and more ordinary people are considering a variety of alternative investments, such as hedge funds, private equity, and even collectible fandom merchandise.
What is alternative investment?
Traditional forms of investment such as bonds, stocks, and cash are different from alternative investments. These investments are typically illiquid and cannot be easily converted into cash. Specific alternative investments include real estate and precious metals. Other assets include hedge funds, distressed securities, and private equity.
The U.S. Securities and Exchange Commission (SEC) does not regulate this type of investment. Previously, only institutional and ultra-high-net-worth investors had access to alternative investments. But this is no longer the case. Private and individual investors include these assets in their portfolios to maximize profits and reduce risk.
One thing that sets alternative investments apart is their low correlation with traditional assets. This means that the factors that affect traditional asset prices do not have quite the same impact on alternative investments. Also, the process of determining its value is more complex. Determining the value of assets like art requires special knowledge. Demand patterns can be unpredictable as they change depending on the latest market trends.
Alternative investments are not easily convertible into cash because demand is relatively low and there is no centralized market. The purchase price is high compared to traditional financial products, and some assets require investors to make a minimum investment.
Current status and types of alternative investments
private equity
Private equity has a long history of generating decent returns and outperforming public markets during economic booms and busts. However, significant changes in interest rates during the pandemic pose serious challenges for investors. Rising interest rates are forcing private equity managers to contend with higher leverage costs.
Investors should be careful when accessing long-term investments such as fintech, security, healthcare, AI and their built-in leverage. Efforts should be focused on reliable, steadily growing companies to minimize the use of leverage and avoid reliance on financing, which can be sensitive to changes in interest rates.
private credit
Following the 2023 regional financial crisis, some banks are now following stricter lending standards and reducing balance sheet exposure. As a result, new businesses face difficulties in obtaining financing. Financial institutions reduced lending. Bond issuance in the public market remains modest, although there are signs of improvement.
In today's market, private credit management companies increasingly provide financing. Investors are enjoying higher returns due to the rise in base interest rates. Private credit can be a safer option than other fixed income sources.
real estate
Recent headlines about office foreclosures and vacancies perpetuate the idea that office real estate is not doing well, despite real estate fundamentals being relatively stable across multiple sectors. Despite falling property values, there are some signs of oversupply.
Short-term debt maturities could cause market anxiety this year. However, there are opportunities to invest in affordable real estate such as data centers, life science offices, and single-family homes.
Hedge fund
Hedge funds are a great option if you are looking for aggressive investment returns. However, they are only suitable for institutional investors and extremely wealthy individuals who are not subject to strict regulatory oversight by the U.S. Securities and Exchange Commission. Hedge fund managers often make risky investments to maximize returns and require high minimum investment amounts from investors.
current trends
democratization
Democratization has had a significant impact on the alternative investment market. Investors now have access to more opportunities than ever before. For example, some people use crowdfunding to get started in alternative investments. Meanwhile, both investors and organizations are opting for private financing opportunities.
Investors looking for unique opportunities
Last year, home prices soared, sparking speculation that the market would crash in 2024. In 2008, after the housing market crashed, several investors took advantage of the opportunity to buy homes cheap. When an economic recession occurs, this trend will repeat itself. Retail investors with cash will be looking at the opportunity to diversify their portfolios and rush to take advantage of the situation.
Investors supporting adaptive companies
As the technological landscape changes, companies that are able to adapt will fare better than those that are unwilling to change the way they operate. Amazon is an early adopter of the e-commerce boom and currently has an advantage in this space. In comparison, Walmart is still playing catch-up.
This divide between adaptive and non-adaptive companies will open several doors of opportunity for smart investors. They can use direct investment, private equity, and hedge funds to back organizations with a proven track record of adaptability to technological change.
