Young Investors Shift 80% to Alternative Assets, Wall Street Adapts

Wall Street is experiencing a significant influx of a new generation of investors who are skeptical of traditional investment methods and are opting for alternative assets. Millennials and Generation Z, primarily under the age of 43 and holding substantial wealth, are directing their investments into cryptocurrencies, real estate, pre-IPO startups, collectibles, and other non-traditional assets. These younger investors have witnessed market crashes, bailouts, and inflation eroding their portfolios, leading them to seek out investment opportunities that fall outside the conventional stock-and-bond mix.

This shift is compelling major financial institutions to rethink how they structure their investment products. Firms like Blackstone and Apollo are introducing ETFs and semi-liquid funds that were previously exclusive to institutional investors. These funds are now accessible through private banks and fintech applications, making them more appealing to retail investors. For instance, Forge Global Holdings lowered its minimum investment threshold to $5,000, resulting in a surge in daily signups, with many new users aiming to gain early access to companies like OpenAI before any potential IPO.

These new investors view the traditional 60/40 portfolio model, which allocates 60% to stocks and 40% to bonds, as outdated. This model failed in 2022 when inflation caused both asset classes to decline simultaneously. In response, Morgan Stanley recently filed to launch a fund that provides access to a diverse range of alternative investments, including private debt, real estate, and infrastructure. A survey revealed that 80% of alternative managers are planning to introduce retail products, nearly double the figure from three years ago, indicating a growing demand and rapid adaptation by Wall Street.

Despite the complexity and risks associated with these alternative investments, demand remains high. Blackstone’s real estate investment trust had to restrict withdrawals in 2022 due to rising interest rates, yet investors continued to flock to these products. Strategists have advised clients to reduce exposure to private credit and equity due to their underperformance compared to public markets. However, the allure of potential high returns and the belief that traditional markets are rigged or fragile continue to drive interest in these high-risk investments.

This trend is not limited to younger generations. Older investors, such as Chad Blackburn, a 45-year-old accountant, have also shifted their focus from equities to Bitcoin and startups. Blackburn’s experience with the dotcom bubble and the great financial crisis led him to explore alternative investments. Many investors share the sentiment that traditional markets are rigged and that unconventional strategies are necessary to achieve wealth. Owen Lamont, a portfolio manager, noted that this mindset is prevalent among younger investors who believe they need to think outside the box to get rich.

The push from retail investors is also driven by the relatively low allocation of alternatives in individual portfolios compared to institutional clients. Pensions, endowments, and insurers allocate about 20% of their portfolios to alternatives, while individuals allocate only 7%. This gap presents a significant opportunity for Wall Street, which is actively pursuing this new investor base. Chris Toomey, managing director at Morgan Stanley Private Wealth Management, highlighted that older investors prefer infrastructure and steady returns, while younger investors are more inclined towards private equity due to their longer investment horizon and higher risk tolerance.

However, not all young investors are embracing alternative assets. Vanguard reports that thousands of Generation Z and millennial savers are holding large sums of cash in default IRAs instead of diversifying their portfolios. This indicates that while there is a growing interest in alternative investments, there is also a segment of younger investors who are more conservative in their approach.