Financial Advisors Can’t Afford to Ignore Alternative Investments Now. Here’s Why.

In the ever-evolving landscape of financial markets, staying ahead of the curve is crucial for financial advisors aiming to optimize their clients' portfolios. As we navigate through 2025, the significance of alternative investments has become more pronounced than ever. With shifting government policies, corporate regulations, trade agreements, and geopolitical tensions, the traditional investment strategies may no longer suffice. This article delves into why financial advisors can't afford to ignore alternative investments and how they can leverage these trends to enhance their clients' investment strategies.

The Rise of Alternative Investments

Alternative investments, encompassing private equity, real estate, infrastructure, and more, have seen a meteoric rise in recent years. The Alternatives industry is projected to grow to over $24 trillion in assets by 2028, up from $15 trillion in 2022. This growth is driven by several key factors, including a continued demand versus supply imbalance, the illiquidity premium, and diversification benefits. Governments across the globe are grappling with historic fiscal constraints, energy transition needs, and geopolitical competition, making private investments a critical source of capital across various industries.

Diversification and Risk Mitigation

One of the primary roles of alternative investments in a portfolio is to enhance diversification and mitigate risks associated with traditional investments. For instance, private equity managers often take a hands-on approach, driving operational improvements in portfolio companies. This has led to private equity consistently outperforming global public equity markets by 4–12% annually. Real assets, such as private real estate and infrastructure, offer both appreciation growth and tax-advantaged income, while helping to mitigate inflation risk over time. Hedge funds can be used as a tool in portfolios to reduce volatility by using hedging strategies and accessing niche exposures that may generate uncorrelated return streams.

Premium Income Generation

Alternative investments can also help investors generate premium income, which is particularly beneficial in a low-yield environment. With the revival of inflation, the pursuit of higher expected returns to grow purchasing power over time has become essential. Alpha opportunities in traditional stocks and bonds have become harder to find, making alternative investments a more attractive option. Private credit, with higher base rates, wider spreads, and protective loan covenants, could support attractive returns into 2024 and beyond, on an absolute basis and relative to public credit and equity markets.

Leveraging Trends for Enhanced Strategies

Financial advisors can leverage these trends to enhance their clients' investment strategies by understanding the unique characteristics of each asset class within the Alternatives industry. For example, private equity, venture capital, private credit, infrastructure, natural resources, and real estate each have distinct expected returns, risks, yields, liquidity, and capital requirements. By sharpening their understanding of portfolio construction with and without Alternatives, as well as across the different categories of such investments, financial advisors can better tailor investment strategies to meet their clients' specific goals and risk tolerances.

Case Study: Real Estate Development

The U.S. housing market, plagued by a persistent shortage, presents a structural opportunity for real estate investors. With an estimated shortage of two to three million homes, the demand for housing far outstrips supply, making new real estate development a pressing social need. This market dislocation is creating investment opportunities in multifamily apartments, senior residential accommodation, and workforce housing. Additionally, the valuation recovery in commercial real estate (CRE) post-pandemic is garnering attention, with areas like industrial and power-related real estate, specialized workspaces, and net-lease investments expected to deliver strong performance over the coming 10 to 15 years.

Conclusion

In conclusion, alternative investments offer financial advisors the opportunity to diversify their clients' portfolios by providing access to a broader opportunity set, enhancing diversification, generating premium income, and mitigating risks associated with traditional investments. By staying informed about these trends and incorporating them into their clients' investment strategies, financial advisors can help their clients achieve robust performance outcomes in the years ahead. As the financial landscape continues to evolve, embracing alternative investments is no longer an option but a necessity for financial advisors aiming to optimize their clients' portfolios.