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Why you might consider alternatives

Alternative investments may provide diversification, enhanced returns, and more.

Key takeaways

  • Alternative investments may provide opportunities for diversification, improved risk-adjusted returns, income generation, and inflation protection.
  • There are more ways for individual investors to invest in alternatives than ever before.

You’re probably familiar with traditional investments, such as stocks, bonds, and cash. But how much do you know about alternative investments? Here’s a quick primer on alternatives and why you may want to think about adding some to your investment mix now.

What are alternatives?

You may see alternative investments referred to as “alternatives” or “alts.” If they sound foreign to you, rest assured that you may already be quite familiar with many alternative investment types. Real estate, gold, and bitcoin all fall under the umbrella of alternatives—which encompasses many investable assets beyond stocks, bonds, and cash-generating accounts.

Alternatives span a wide range of investments with varying characteristics, such as the ability to meet different investing goals, with unique risks and different degrees of liquidity (more on this later). They include hedge funds, private equity, private credit, real assets, digital assets, and liquid alt funds.

Why alternatives?

While alternatives share the feature of being nontraditional investments, each category has different characteristics—both when compared to traditional investments as well as to each other. In addition to the diversification benefits that alternatives can provide when integrated with a traditional investment mix, alternatives may also help enhance returns, manage risk, generate income, and/or protect against inflation.

  • Expanded investment universe. Alternative investments can help investors expand beyond traditional asset classes, providing additional options to potentially grow and manage your money.
  • Potentially enhanced returns or income. If one of your main investing objectives is to grow your money, research on alternatives has shown they can help enhance returns or generate income. Certain strategies may also help generate higher yields versus traditional asset classes, as they can benefit from regular interest payments from directly originated loans.
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Past performance is no guarantee of future results. Traditional asset categories: US large-cap equity—Russell 1000 Index; US small-cap equity— Russell 2000 Index; developed-market equity—MSCI EAFE Index; emerging-market equity—MSCI Emerging-Market Index; Treasuries—Bloomberg US Long Treasury Index; Treasury inflation-protected securities—Bloomberg US Treasury Inflation Linked Bond Index; US Investment-Grade Bonds—Bloomberg US Credit Index; high-yield bonds—ICE BofA US High-Yield Index; REITs—FTSE NAREIT All Equity REIT Index. Alternative categories: liquid alternatives—HFRI Macro Total Index and HFRI EH Equity Market-Neutral Index; managed futures: SG CTA Index (note, there may be managed futures strategies in both the HFR and SG indexes); private equity—equity-generalist, buyout, and venture capital reflect annual return data from MSCI Private Assets; private credit—direct senior+mezz lending, and distressed debt reflect annual return data from MSCI Private Assets; real assets—private real estate represented by the NFI-ODCE Index. MSCI Private Assets data used in this research reflects returns of US private capital funds and funds of funds. See footnotes for index/asset category details. Equity generalists pursue strategies using various investment objectives, which compares with specialists who utilize more narrow strategies. Sources: Bloomberg Finance L.P., HFR Inc., www.HFR.com, © 2024 HFR, Inc. All rights reserved, Morningstar, MSCI Private Assets, Societe Generale, NCREIF, Fidelity Investments, as of Dec. 31, 2023.
  • Diversification benefits. Diversification across asset classes (in addition to diversification within asset classes) has been demonstrated to provide superior risk-adjusted returns. Alternatives can provide returns that differ from traditional investments. Diversification potential can be seen in the lower correlations that many alternatives have exhibited historically with traditional investments (and with each other). Correlation refers to how assets perform relative to one another (with lower correlations providing more diversification benefits). Of course, it’s worth noting that some alternatives have shorter track records than traditional investments—particularly relatively new alternative categories like digital assets—so there is not as much data to assess. With that said, recent data shows that correlations for alternatives are generally low with each other and with traditional investments.
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Past performance is no guarantee of future results. Average correlations with the other 17 asset classes. Traditional asset categories: U.S. large cap equity—Russell 1000 Index; U.S. small cap equity—Russell 2000 Index; developed-market equity—MSCI EAFE Index; emerging-market equity— MSCI Emerging-Market Index; Treasuries—Bloomberg U.S. Long Treasury Index; Treasury inflation-protected securities—Bloomberg U.S. Treasury Inflation Linked Bond Index; investment-grade bonds—Bloomberg U.S. Credit Index; high-yield bonds—ICE BofA U.S. High Yield Index; REITs— FTSE NAREIT All Equity REIT Index. Alternative categories: liquid alternatives—HFRI Macro Total Index and HFRI EH Equity Market Neutral Index; managed futures: SG CTA Index (note, there may be managed futures strategies in both the HFR and SG indexes); private equity—equity-generalist, buyout, and venture capital reflect annual return data from MSCI Private Assets; private credit—direct senior+mezz lending, and distressed debt reflect annual return data from MSCI Private Assets; real assets—private real estate represented by the NFI-ODCE Index. MSCI Private Assets data used in this research reflects returns of U.S. private capital funds and funds of funds. See Appendix for underlying index details. See Appendix for index/asset category definitions. Sources: Bloomberg Finance L.P., HFR Inc., www.HFR.com, © 2024 HFR, Inc. All rights reserved, Morningstar, MSCI Private Assets, Societe Generale, NCREIF, Fidelity Investments, as of Dec. 31, 2023.
  • Potential to manage risk. Alternatives can lower the overall volatility of your investment mix through greater diversification. Additionally, they may help manage the risk of your overall investment mix. The chart below shows how alternatives have generally outperformed traditional investments when the Russell 1000 has had its worst performance.
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Past performance is no guarantee of future results. Average annual returns in the bottom four return years for the Russell 1000 Index from 2005 to 2023. Traditional asset categories: U.S. large cap equity—Russell 1000 Index; U.S. small cap equity—Russell 2000 Index; developed-market equity—MSCI EAFE Index; emerging-market equity—MSCI Emerging-Market Index; Treasuries—Bloomberg U.S. Long Treasury Index; Treasury inflation-protected securities— Bloomberg U.S. Treasury Inflation Linked Bond Index; investmentgrade bonds—Bloomberg U.S. Credit Index; high-yield bonds—ICE BofA U.S. High Yield Index; REITs—FTSE NAREIT All Equity REIT Index. Alternative categories: Liquid alternatives—HFRI Macro Total Index and HFRI EH Equity Market Neutral Index; Managed futures: SG CTA Index (note, there may be managed futures strategies in both the HFR and SG indexes); private equity—equity generalist, buyout, and venture capital reflect annual return data from MSCI Private Assets; private credit—direct senior+mezz lending, and distressed debt reflect annual return data from MSCI Private Assets; real assets—private real estate represented by the NFI-ODCE Index. MSCI Private Assets data used in this research reflects returns of U.S. private capital funds and funds of funds. See Appendix for index/asset category definitions. Sources: Bloomberg Finance L.P., HFR Inc., www.HFR.com, © 2024 HFR, Inc. All rights reserved, Morningstar, MSCI Private Assets, Societe Generale, NCREIF, Fidelity Investments, as of Dec. 31, 2023.
  • Potential to mitigate inflation. Some alternatives can help offset losses associated with inflation. In particular, private real estate has demonstrated a resistance to inflationary effects.

Why alternatives now?

Historically, institutional and wealthy investors have had access to alternatives. That’s primarily because these types of investors are generally not as constrained by liquidity needs when compared with individual investors. Liquidity refers to how easy it is to turn an asset into cash. Highly liquid assets (like stocks) are relatively easy to turn into cash, whereas illiquid assets (like many private market alternatives) can be difficult to turn into cash quickly.

But changes have been afoot in recent years, making it more possible for individual investors to consider alternatives.

The ability to invest in alternatives has expanded for individual investors. For example, there has been increasing development and access to private market alternative investments, including intermittent liquidity funds—such as unlisted business development companies, interval funds, and tender offer funds.

Another recent development has been the growing number of “liquid alternatives.” These include funds that invest in public market assets and/or derivatives, while implementing alternative strategies such as long/short investing that can help enhance returns, diversify, and provide risk mitigation to an overall portfolio.

The emergence of digital assets (e.g., cryptocurrencies) is another example. The newest alternative asset class has featured strong liquidity (at least for bitcoin, the world’s largest cryptocurrency by market cap) alongside historically outsized returns—albeit with significant price volatility.

Alternative investing

While most investors have familiarity with buying stocks and putting cash in accounts that generate interest, far fewer have experience investing in alternative investments. That may change in the coming years.

Investors who allocate some percentage of their investment mix to alternatives, rather than sticking solely with stocks and bonds, may be able to improve their long-term investment results.

Of course, investing in alternatives may not be right for everyone. They can be much more complex than traditional investments. Some have high minimum investments and long time horizons. For example, investing in illiquid alts can mean locking your money up for multiple years (a “lock-up” period is a predetermined time that the investor is not able to redeem their investment). Moreover, some alternatives can be volatile, and may not align with your investing objectives.

With that said, emerging assets and innovative new products are offering ways for more investors to get access to alternatives that may not have previously been possible. Depending on your specific goals, alternatives may be an opportunity worth considering.

Explore alternative investments

Expand beyond stocks, bonds, and cash.

Learn more

More to explore

Past performance is no guarantee of future results.

Diversification and asset allocation do not ensure a profit or guarantee against loss.

Investment decisions should be based on an individual’s own goals, time horizon, and tolerance for risk.

Stock markets are volatile and can fluctuate significantly in response to company, industry, political, regulatory, market, or economic developments. Investing in stock involves risks, including the loss of principal.

 Index definitions: Bloomberg U.S. Credit Index is a market value-weighted index of investment-grade corporate fixed-rate debt issues with maturities of one year or more. Bloomberg U.S. Long Treasury Index measures the performance of U.S. dollar-denominated, fixed-rate, nominal debt issued by the U.S. Treasury with a maturity greater than 10 years. Bloomberg U.S. Treasury Inflation-Protected Securities (TIPS) Index (Series-L) is a market value-weighted index that measures the performance of inflation-protected securities issued by the U.S. Treasury. NFI-ODCE Index (NCREIF), short for NCREIF Fund Index Open End Diversified Core Equity, is an index of investment returns reporting on both a historical and current basis the results of 38 open end commingled private real estate funds pursuing a core investment strategy, some of which have performance histories dating back to the 1970s. ICE BofA U.S. High Yield Index is a market capitalization-weighted index of U.S. dollar-denominated, belowinvestment- grade corporate debt publicly issued in the U.S. market. The FTSE NAREIT All Equity REITs Index is a free-float-adjusted, market capitalization-weighted index of U.S. equity REITs. Constituents of the index include all tax-qualified REITs with more than 50% of total assets in qualifying real estate assets other than mortgages secured by real property. HFRI Macro Total Index: Investment managers who trade a broad range of strategies in which the investment process is predicated on movements in underlying economic variables and the impact these have on equity, fixed income, hard currency, and commodity markets. Managers employ a variety of techniques, both discretionary and systematic analysis, combinations of top-down and bottom-up theses, quantitative and fundamental approaches, and long and short-term holding periods. Although some strategies employ relative value techniques, macro strategies are distinct from relative value strategies in that the primary investment thesis is predicated on predicted or future movements in the underlying instruments, rather than realization of a valuation discrepancy between securities. In a similar way, while both macro and equity hedge managers may hold equity securities, the overriding investment thesis is predicated on the impact movements in underlying macroeconomic variables may have on security prices, as opposed to equity hedge, in which the fundamental characteristics on the company are the most significant and integral to investment thesis. In order to be considered for inclusion in the HFRI Monthly Indices, a hedge fund manager must submit a complete set of information to the HFR Database. Additionally, all HFRI constituents are required to report in U.S. dollars monthly, net of all fees, performance and assets under management. Constituent funds must have either $50 million assets under management or at least $10 million USD assets under management on the last reported month prior to the index rebalance and have been actively trading for at least 12 months. HFRI EH Equity Market Neutral Index: Equity market-neutral strategies employ sophisticated quantitative techniques of analyzing price data to ascertain information about future price movement and relationships between select securities for purchase and sale. These can include both factor-based and statistical arbitrage/trading strategies. Factor-based investment strategies include strategies in which the investment thesis is predicated on the systematic analysis of common relationships between securities. In many but not all cases, portfolios are constructed to be neutral to one or multiple variables, such as broader equity markets in dollar or beta terms, and leverage is frequently employed to enhance the return profile of the positions identified. Statistical arbitrage/trading strategies consist of strategies in which the investment thesis is predicated on exploiting pricing anomalies that may occur as a function of expected mean reversion inherent in security prices; high-frequency techniques may be employed and trading strategies may also be employed on the basis of technical analysis or opportunistically to exploit new information the investment manager believes has not been fully, completely, or accurately discounted into current security prices. Equity market-neutral strategies typically maintain characteristic net equity market exposure no greater than 10% long or short. SG CTA Index is designed to track the largest 20 (by AUM) CTAs and be representative of the managed futures space. Managers must be open to new investment and report returns on a daily basis. The CTA Index is equally weighted, and rebalanced and reconstituted annually. The MSCI Europe, Australasia, Far East Index (EAFE) is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in developed markets, excluding the United States and Canada. MSCI Emerging-Markets (EM) Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors in emerging markets. The Russell 1000 Index is a market capitalization-weighted index designed to measure the performance of the large cap segment of the U.S. equity market. The Russell 2000 Index is a market capitalization-weighted index designed to measure the performance of the small cap segment of the U.S. equity market. It includes approximately 2,000 of the smallest securities in the Russell 3000 Index. Alternative investment strategies may not be suitable for all investors and are not intended to be a complete investment program. Alternatives may be relatively illiquid; it may be difficult to determine the current market value of the asset; and there may be limited historical risk and return data. Costs of purchase and sale may be relatively high. A high degree of investment analysis may be required before investing. Investing in digital assets, such as bitcoin, is speculative and may involve a high degree of risk. Digital assets can become illiquid at any time and are only for those investors willing to risk losing some or all their investment and who have the experience and ability to evaluate the risks and merits of an investment in bitcoin.

Investing involves risk, including risk of loss.

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