The Rise of Alternative Investments: Should Advisors Include Them in Client Portfolios?

Alternative investments have moved from the fringe to the forefront of portfolio construction, driven by market volatility, rising inflation, and a broader search for diversification. Once reserved for institutional investors and ultra-high-net-worth clients, alternatives are now increasingly accessible to the average investor—and financial advisors are taking note.

But are alternatives right for your clients? And if so, how should they fit into a well-diversified strategy? Let’s explore the landscape.

What Are Alternative Investments?

Alternative investments are assets that fall outside of traditional stocks, bonds, and cash. They include:

• Private equity and venture capital
• Real estate (REITs, direct ownership, private funds)
• Hedge funds
• Commodities (e.g., gold, oil, agricultural goods)
• Private credit / direct lending
• Collectibles and digital assets (art, wine, NFTs, crypto)

Many of these alternatives offer low correlation to public markets, which makes them attractive during periods of market stress or rising interest rates.

Why the Surge in Popularity?

Several forces are fueling the rise of alternatives:

📉 Market Volatility: Traditional 60/40 portfolios have faced pressure from both stock and bond market declines in recent years.
📈 Inflation Hedge: Assets like real estate and commodities can provide a buffer against inflation.
🔒 Diversification: Alternatives often behave differently from public equities, helping to reduce overall portfolio volatility.
🧱 Access & Technology: Platforms like iCapital, CAIS, and alternatives-focused ETFs are making it easier for advisors to include alts in smaller portfolios.

Key Considerations Before Including Alternatives

While alternatives can be powerful tools, they come with unique considerations:

1. Liquidity Constraints

Many alts are illiquid, with multi-year lockups or limited redemption windows—making them unsuitable for clients needing near-term access to capital.

2. Complexity & Transparency

Understanding the underlying strategies and risks can be difficult. Advisors need to conduct robust due diligence and educate clients accordingly.

3. Fees

Many alts carry higher management and performance fees, which can eat into returns if not properly vetted.

4. Suitability & Accreditation

Some products require clients to be accredited investors. Advisors must ensure investments align with both the client’s financial situation and risk tolerance.

Who Might Benefit from Alternatives?

Not every client needs exposure to alternatives, but they may be a good fit for:

• High-net-worth clients looking to diversify beyond public markets
• Clients nearing or in retirement seeking income from private credit or real estate
• Growth-oriented investors with long time horizons and high risk tolerance
• Tax-sensitive investors interested in opportunity zones or tax-advantaged private real estate

How to Introduce Alternatives to Clients

Start with education. Explain:

• What alternatives are
• Why they’re gaining traction
• The risks and potential rewards
• How they would fit into their overall plan

📊 Example: “We’re not replacing your core portfolio, but adding a 10–15% allocation to private real estate could reduce volatility and generate more stable income.”

Tools and Platforms for Advisors

Many advisors are turning to platforms that make alternatives easier to access, analyze, and manage:

• iCapital, CAIS, Lumen, Altigo – Access to vetted funds with built-in due diligence
• Blackstone, Hamilton Lane, Apollo – Institutional providers expanding advisor channels
• ETF Options – Liquid alts like managed futures, long/short equity, or multi-asset strategies

🧠 Tip: Consider starting with liquid alternatives before introducing illiquid strategies.

Final Thoughts

The rise of alternative investments presents both opportunity and responsibility. While they can enhance diversification and long-term returns, they require thoughtful integration, transparency, and an advisor-led education process.

Including alternatives isn’t just about chasing performance—it’s about crafting a more resilient, customized portfolio that aligns with each client’s goals.