Diversification: Why Alternatives Deserve a Seat at the Table

In today’s market environment, smart money is thinking differently and acting accordingly. Institutional investors such as pension funds, endowments, and charitable foundations have long embraced alternative investments as a core component of their strategy. The reason? They know something many retail investors have yet to fully realize: real diversification requires going beyond just stocks and bonds.

So, why isn’t this as accessible for retail investors? Simply put, it’s a lack of evolution and, more importantly, innovation in the investment industry.

Despite their growing role in financing the economy, private markets remain underrepresented in the average investor’s portfolio. While most traditional investors generally allocate less than 5% to alternatives, institutional portfolios and portfolio managers like us often hold four times that amount, with allocations aligned with long-term goals, income stability, and risk management.

The events of 2022 served as a wake-up call. Inflation surged. Interest rates jumped. And both equities and bonds moved in the same direction – downwards. The traditional investment approach of holding a combination of stocks and bonds, often referred to as a 60/40 portfolio and long considered a cornerstone of prudent investing, proved vulnerable in a market where nothing behaved as expected.

Alternatives, such as private credit, infrastructure, real estate, and private equity, offer different return drivers and can act as powerful diversifiers. These asset classes often have lower correlations to public markets and have the potential to provide more consistent, risk-adjusted returns. They also open the door to opportunities that simply aren’t available in public markets, where the number of listed companies has dropped by nearly 40% over the past two decades.

More than 87% of U.S. companies with over $100 million in revenue are private. If you’re only investing in public markets, you’re missing a large and dynamic part of the economy. Private credit can offer attractive, floating-rate income. Real estate and infrastructure can help hedge against inflation. Private equity provides exposure to innovation and growth before it hits the public radar.

In a world of persistent volatility, longer lifespans, and evolving retirement needs, alternative investments aren’t just for institutions anymore.

We believe that incorporating alternative investments into portfolios can help mitigate vulnerabilities to volatile environments and also provide access to investments beyond stocks and bonds. By diversifying beyond traditional assets, investors could achieve stronger risk-adjusted returns and better align their portfolios to meet long-term financial goals.