The Growing Popularity of Alternative Investments

By Brian D. Buehler, Managing Partner of Triton Pacific Capital Partners

It might be difficult to remember now, but near the onset of 2022, financial advisors and their clients faced a near-zero interest rate environment and compelling valuations in both the stock and bond markets. Since then, however, the market environment has been largely shaped by macroeconomic concerns. The Fed has raised interest rates eleven times to its current target rate of 5.25% to 5.50%, the highest rate in 22 years, as reported by The Wall Street Journal; October’s 3.2% inflation rate continues to exceed the Fed’s target of 2%; and global geopolitical tensions continue to persist, contributing to an environment of heightened uncertainty.

Against the backdrop of these challenges, alternative investments and their potential advantages are becoming increasingly popular with financial advisors and retail investors. In fact, Ernst & Young states that adoption of alternative investments by mass affluent investors (those earning between $250,000 to $1,000,000) is expected to increase to 32% by 2024, more than doubling its usage from 2021. Similarly, 53% of financial advisors plan to raise their alternative investments allocations to more than 15% in the next two years, and more than 20% of advisors expect that their alternative investments allocations will be in excess of 25% of their portfolios, according to Wealth Management.

Financial advisors may be drawn to alternative investments because offering these alternative asset classes is often a way to differentiate their financial practices while also attracting high-net-worth individuals and improving their ability to attract and retain clients. Alternative investments often demand a high level of knowledge and expertise. Financial advisors must not only understand the intricacies of their alternative products for themselves, but they are also tasked with effectively communicating these complexities to their clients. In essence, advisors can set themselves apart by seamlessly integrating this comprehensive education into their interactions, thereby offering a distinctive and tailored experience for each client.

Additionally, Wealth Management reports that 71% of advisors currently consider alternative investments to be a “good investment” for their clients. This may be because alternative investments offer a host of potential benefits:

• Potential for positive absolute returns – In contrast to traditional long-only investments tied to bullish markets, many alternative investment strategies aim for positive returns irrespective of broader market performance.
• Potential for uncorrelated returns – Alternative investments often exhibit independence from the movements of stocks and bonds, offering valuable diversification benefits.
• Potential for market hedge – Alternative investments historically have the potential to excel during market downturns, serving as a hedge against market risk.
• Greater transparency – Investors in alternative investments may benefit from enhanced transparency compared to their liquid counterparts.
• May be well-suited for investors with lower risk tolerance – Highly illiquid investments, such as many alternative assets, often align well with investors seeking fewer surprises.

Looking ahead, a notable 60% of advisors are actively considering or likely to pursue the expansion of the alternative investment side in their business, according to a recent survey by Wealth Management. With the growing popularity of alternative investments, investors today have a wide spectrum of strategies to choose from, each designed to support different objectives and with a unique risk-return profile.

To learn more about why alternative investments may be growing in popularity and how they may benefit both financial advisors and many individual investors, read our full white paper. Download it here.

The views and opinions expressed in the preceding article are those of the author and do not necessarily reflect the views of The DI Wire. 

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