I have been in several conversations lately about why traditional 60/40 portfolio of stocks and bonds no longer delivers the returns it once did. As market volatility increases and interest rates fluctuate, investors are looking beyond public markets for opportunities. Alternative investments have emerged as a powerful solution for those seeking diversification, higher yields, and protection against market downturns. By definition, alternative investments are investments outside of stocks, bonds, mutual funds and ETF’s.
According to Goldman Sachs, alternative assets now represent a $14 trillion market, and projections suggest this could reach $23 trillion by 2026. Wow, that is a massive amount of growth! What was once reserved for institutional investors and the ultra-wealthy is now accessible to accredited investors (and in some cases non-accredited) through structured funds and platforms.
I put this guide together to explain what these alternative investments are, why they matter, and how strategies like real estate debt funds fit into a modern investment portfolio.
What Are Alternative Investments?
Alternative investments are any asset class outside of traditional stocks, bonds, and cash. These investments typically have low correlation to public markets, meaning they often perform differently than the stock market. When stocks decline, well-structured alternative investments may hold steady or even appreciate.
The defining characteristics of alternative investments include low correlation to traditional markets, potential for higher returns,
Low correlation to traditional markets.
Alternative investments do not move in lockstep with the S&P 500. This provides genuine diversification rather than simply owning more stocks.
Potential for higher returns. Many alternative investments target returns that exceed public market averages, though this often comes with different risk profiles.
Longer investment horizons.
Unlike stocks that can be sold instantly, many alternative investments have holding periods of 3 to 10 years.
Less liquidity.
Most alternative investments cannot be sold quickly. This illiquidity is often compensated through higher returns.
Access to unique opportunities.
Alternative investments provide exposure to asset classes and strategies unavailable in public markets.
The Main Types of Alternative Investments
Alternative investments span a wide range of asset classes. Here are the most common categories:
Real Estate
Real estate remains one of the most popular alternative investments. Investors can participate through direct ownership, syndications, REITs, or debt funds.
Direct ownership involves purchasing and managing properties. This provides maximum control but requires significant capital, time, and expertise.
Real estate syndications pool investor capital to acquire larger properties like apartment complexes or commercial buildings. Investors receive quarterly or monthly distributions from rental income and profit from appreciation when the property sells.
Real estate debt funds provide loans to real estate investors and developers. These funds offer monthly income from interest payments while being secured by real property. You can see a good example of how these work here [the SRP Debt Fund]
Private Equity
Private equity involves investing in companies not traded on public exchanges. Firms acquire businesses, improve operations, and sell for a profit within 5 to 10 years.
According to J.P. Morgan, private equity has historically outperformed public markets, though with higher volatility and longer lock-up periods. Investors typically need substantial capital to access private equity funds, with minimums often starting at $250,000 or more.
Private Credit
Private credit fills the lending gap left by traditional banks. Since the 2008 financial crisis, banks have retreated from many types of lending, creating opportunities for private credit funds. Goldman Sachs reports that private credit has become one of the fastest-growing alternative investment categories. These funds provide loans to businesses or real estate projects, generating returns from interest payments.
Real estate debt funds are a subset of private credit, focusing specifically on property-backed loans. These funds often target 8% to 12% annual returns through monthly interest payments.
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Hedge Funds
Hedge funds employ sophisticated strategies including short selling, leverage, and derivatives. These funds attempt to generate positive returns regardless of market conditions.
While hedge funds offer potential for high returns, they also carry significant fees. The traditional “2 and 20” fee structure means investors pay 2% annually plus 20% of profits.
Commodities
Commodities include physical assets like gold, oil, agricultural products, and precious metals. Investors can access commodities through direct ownership, futures contracts, or commodity-focused funds. Commodities often perform well during inflationary periods, providing a hedge when currency values decline.
Collectibles and Tangible Assets
Art, wine, classic cars, and rare coins represent the collectibles category. These assets can appreciate significantly but require specialized knowledge and may be difficult to sell quickly. The collectibles market lacks the transparency and liquidity of other alternative investments, making them more suitable for passionate collectors than serious investors seeking consistent returns.
Why Investors Choose Alternative Investments
The shift toward alternative investments is driven by several compelling factors:
Diversification Beyond Public Markets
When stocks and bonds both decline simultaneously, as they did in 2022, traditional portfolios suffer. Alternative investments with low correlation to public markets provide genuine diversification. Real estate debt funds, for example, generate returns from contractual interest payments rather than stock market performance. This creates a buffer against market volatility.
Higher Return Potential
Many alternative investments target returns that exceed public market averages. Private credit funds often target 8% to 12% annually, compared to long-term stock market averages around 10%. The trade-off is typically less liquidity and longer holding periods. Investors must be comfortable committing capital for several years.
Income Generation
Some alternative investments provide regular income distributions. Real estate syndications and debt funds often distribute quarterly or monthly cash flow, creating a steady income stream This makes alternatives particularly attractive for retirees or investors seeking to replace employment income with passive cash flow.
Inflation Protection
Real assets like real estate and commodities tend to appreciate during inflationary periods. As the cost of goods and services rises, so does the value of physical assets.
Real estate investments benefit from inflation through both rising property values and increasing rents. Debt funds with floating interest rates can also capture higher returns as rates rise.
Access to Institutional-Quality Deals
Alternative investment funds provide access to opportunities historically reserved for large institutions. Individual investors can now participate in commercial real estate acquisitions, private equity deals, and infrastructure projects through structured funds.
Understanding Alternative Investment Risks
Alternative investments are not without risks. Investors must understand these factors before allocating capital:
Liquidity Risk
Most alternative investments cannot be sold quickly. Real estate syndications typically have 5 to 7 year hold periods. Private equity funds may lock up capital for 10 years or more.
Investors should only commit capital they will not need for the investment’s duration.
Complexity
Alternative investments often involve sophisticated structures and strategies. Understanding the investment thesis, risk factors, and potential returns requires due diligence.
Working with experienced fund managers and advisors helps navigate this complexity.
Higher Fees
Many alternative investments charge higher fees than index funds or traditional investments. Management fees, performance fees, and acquisition costs can reduce net returns.
Investors should understand all fees and ensure they are compensated through higher returns.
Limited Transparency
Unlike public stocks with daily pricing and quarterly reports, many alternative investments provide less frequent updates. This reduced transparency requires trust in the fund manager and thorough upfront due diligence.
Manager Selection Risk
The quality of the fund manager significantly impacts returns. A skilled manager can generate exceptional results while a poor manager may lose capital.
Vetting track records, references, and investment processes is essential before committing capital.
Who Should Invest in Alternatives?
Alternative investments are not suitable for everyone. They work best for investors with specific characteristics:
Accredited investor status.
Accredited investor status. Most alternative investment funds require investors to be accredited, meaning they earn $200,000 annually (or $300,000 jointly) or have a net worth exceeding $1 million excluding their primary residence.
Long-term investment horizon.
Investors must be comfortable with holding periods of 3 to 10 years without access to capital.
Diversified portfolio base.
Alternative investments should complement, not replace, traditional investments. Most advisors recommend allocating 10% to 30% of a portfolio to alternatives.
Risk tolerance.
While many alternatives target lower volatility than stocks, they carry different risks including illiquidity and manager risk.
Income focus. Investors seeking regular distributions often find alternatives attractive, particularly real estate debt funds and income-focused private credit.
How to Get Started with Alternative Investments
For investors ready to explore alternatives, here is a practical 6-step framework.
Step 1: Define Your Investment Goals
Clarify what you want from alternative investments. Are you seeking:
- Higher total returns
- Monthly or quarterly income
- Diversification from stock market volatility
- Inflation protection
- Tax advantages
Your goals will guide which alternative investment categories make sense.
Step 2: Determine Your Allocation
Most financial advisors suggest starting with 10% to 20% of your portfolio in alternatives. As you gain experience and comfort, this can increase to 30% or more.
Younger investors with longer time horizons may allocate more to growth-focused alternatives like private equity. Investors nearing retirement might prefer income-generating strategies like debt funds.
Step 3: Research Fund Managers
The manager makes the investment. Look for:
- Track record of 5+ years
- Transparent reporting
- Clear investment thesis
- Strong references from existing investors
- Alignment of interests through manager co-investment
Step 4: Understand the Investment Structure
Review offering documents carefully. Understand:
- Hold period and exit strategy
- Fee structure
- Distribution schedule
- Tax implications
- Redemption rights, if any
Step 5: Start Small
Make your first alternative investment a smaller position. This allows you to learn the process, understand reporting, and evaluate performance before committing larger amounts.
Step 6: Diversify Across Strategies
Do not put all alternative investment capital into one fund or strategy. Spread across multiple managers, asset classes, and vintage years to reduce concentration risk.
Alternative Investments and Your Portfolio. The role of alternative investments continues to expand. What began as a niche for institutional investors has become a core component of sophisticated portfolios.
According to J.P. Morgan, institutional investors now allocate an average of 50% to alternatives. While individual investors typically allocate less, the trend is clearly moving toward greater alternative investment exposure. Real estate debt funds represent one of the most accessible entry points into alternatives. These funds provide:
- Monthly income from interest payments
- Asset-backed security through property liens
- Lower volatility than equity investments
- Transparent structures easy to understand
For investors seeking diversification beyond stocks and bonds, alternatives offer compelling opportunities. The key is thorough due diligence, appropriate allocation, and realistic expectations about liquidity and time horizon.
Conclusion
Alternative investments have evolved from exclusive institutional strategies to accessible opportunities for investors. The $14 trillion alternative investment market continues growing as investors seek diversification, higher yields, and protection against market volatility. Real estate, private equity, private credit, hedge funds, commodities, and collectibles each offer unique characteristics. The right alternative investments depend on individual goals, risk tolerance, and investment horizon.
For those ready to explore beyond traditional portfolios, alternative investments provide powerful tools for building wealth and generating income. The most important steps are education, due diligence, and starting with experienced fund managers who have proven track records. As with any investment decision, consulting with financial and legal advisors ensures alternative investments align with your overall financial plan and risk profile.
About the Author
Mike Krieg is co-founder of LeadOut Invest. He earned his degree in Finance from the University of Montana. His real estate career began in the early 2000s as an expatriate in Samara, Russia, where he raised capital to purchase homes and helped other expats do the same. Since then, Mike has co-sponsored projects totaling over 7,000 apartment and self-storage units, been featured on the BiggerPockets Real Estate Podcast, and taught multifamily syndication to university finance students.
Mike is also the Founder of Storyline, an organization providing leadership training for local leaders worldwide. He lives with his wife Kristen and their three children.
Disclaimer: This article is for educational purposes only and does not constitute investment advice. All investments carry risk, including potential loss of principal. Past performance does not guarantee future results. Investors should consult with qualified financial and legal advisors before making investment decisions.
