Alternative Investments: What They Are and When They Make Sense for Your Portfolio

When you think about investing, stocks, bonds, and mutual funds are often the first assets that come to mind. These traditional investments have long formed the core of many portfolios. However, with recent market volatility and shifts in economic conditions, there’s growing recognition among investors and experts that incorporating alternative investments can enhance diversification and help build more resilient portfolios.

Barbara Stewart, CFA, recently shared this insight about the growing influence in alternative assets:

"As women gain ground in alternative assets, their influence will grow. By tapping into their original inspiration for entering the industry, trusting their intuition, and staying focused on impact, women bring a powerful edge to investment decisions. These value-driven factors make them a distinct and transformative force in the alternatives space."
(source: CFA Institute)

If you’ve been curious about what alternative investments are and whether they might be right for you, this blog will provide clarity on how they work, their potential benefits, and key considerations before diving in.

What Are Alternative Investments?

Alternative investments are assets that fall outside the usual categories of stocks, bonds, and cash. Examples include real estate, private equity, hedge funds, commodities like gold, infrastructure projects, collectibles such as art, and even cryptocurrencies. Other alternatives you might come across include private lending (providing loans to businesses or individuals), reinsurance (investing in insurance risk), and market-neutral strategies (aimed at generating returns regardless of market direction by balancing long and short positions). These investments often behave differently from traditional assets and may provide diversification benefits by reducing your portfolio’s overall risk.

Why Consider Alternatives?

Investors turn to alternatives for several reasons:

• Diversification: Because alternatives typically have low correlation with stocks and bonds, they can help smooth out portfolio performance.

• Inflation Protection: Some alternatives, like real estate or commodities, may offer a hedge against inflation.

• Potential for Higher Returns: Though riskier and less liquid, some alternative investments aim to deliver returns beyond what traditional markets offer.

• Values Alignment: Alternative investments provide opportunities to align your portfolio with what matters most—whether that’s sustainability, social impact, or innovation. Rapidly growing sectors like artificial intelligence, cybersecurity, and health research are attracting interest. Many find themselves drawn to healthcare and Femtech—technologies advancing women’s health—as a way to invest in causes that feel meaningful and forward-looking.

However, alternatives come with downsides: they can be complex, less regulated, less liquid, and often involve higher fees.

When Are Alternatives Appropriate?

Alternative investments may be a good fit if you:

• Have a long investment horizon and can tolerate illiquidity.

• Have a solid base of traditional investments already.

• Are comfortable with complexity and the possibility of higher fees.

• Want to diversify risk beyond traditional asset classes.

• Want your investments to reflect your personal values.

• Meet any accreditation requirements (more on this below).

Important Considerations Before Exploring Alternatives

Here are some key areas to understand before adding alternatives to your portfolio:

1. Tax Considerations

Alternative investments often come with unique tax implications. For example, real estate may provide depreciation benefits, but private equity gains can be taxed differently than regular income. Collectibles have their own tax rules. Because tax treatment can vary widely, it’s important to consult with a tax professional familiar with alternative assets.

2. Fees and Expenses

Alternatives typically have higher fees than traditional investments. For instance, private equity and hedge funds often charge a “2 and 20” fee structure—2% of assets under management plus 20% of profits. These fees can significantly impact your net returns over time, so understanding fee structures upfront is critical.

3. Unique Risks

Beyond market risks, alternatives have risks like valuation challenges since many don’t have daily market prices. Regulatory environments can also be more complex or less transparent, and illiquidity means it may be difficult to exit an investment quickly.

4. Portfolio Size and Minimum Investment

Many alternative investments require minimum commitments, which can be $25,000 or much higher. Alternatives often make more sense for investors with a substantial portfolio base who can dedicate a portion to less liquid, higher-risk investments.

5. How to Evaluate an Alternative Investment

Due diligence is essential. Look for experienced managers with strong track records, clear and transparent terms, and reasonable lock-up or redemption periods. Understanding the investment’s structure and exit options helps manage expectations.

Checklist: What to Consider Before Investing

Before you commit capital, ask yourself:

• Am I an accredited investor?
  Some alternatives require accredited investor status (typically net worth over $1 million excluding primary residence, or annual income over $200,000 individually or $300,000 jointly).

• Can I afford illiquidity?
  Willingness to lock up money for years is key since many alternatives limit access to funds.

• Is my overall portfolio diversified?
  Alternatives often work best as part of a balanced portfolio.

• Am I comfortable with fees and complexity?
  Understand how fees impact returns and be prepared for less straightforward investment structures.

• Have I done thorough due diligence or consulted someone I trust?
  Professional advice can make a big difference in navigating alternatives wisely.

How to Access Alternative Investments

You can get exposure to alternatives in different ways:

• Direct investments: Buying property, art, or other tangible assets.

• Funds: Private equity funds, hedge funds, or ETFs that focus on commodities or other alternative sectors.

• Accredited-only funds: Many private funds require accredited investor status due to regulations.

Knowing the structure and requirements before committing capital is important.

How a Financial Advisor Can Help

Navigating alternative investments can be complex, from understanding fees and tax implications to evaluating managers and liquidity terms. Working with a fee-only financial advisor who has expertise in these areas can make a big difference. A trusted advisor can help:

• Assess whether alternatives fit your overall financial plan and goals

• Provide guidance on the appropriate percentage of your portfolio to allocate to alternatives, ensuring diversification without overexposure

• Guide you through due diligence and risk evaluation

• Clarify fee structures and tax considerations

• Help structure your portfolio to balance liquidity and diversification needs

Because alternatives can be sophisticated and sometimes illiquid investments, it’s important to approach them thoughtfully rather than jumping in quickly. Choosing a fee-only advisor ensures you receive unbiased advice, free from commission-based conflicts, focused solely on what’s best for your financial future.

The Takeaway

Alternative investments can play an important role in building a resilient, diversified portfolio, offering opportunities beyond traditional stocks and bonds. But they are not one-size-fits-all. They require careful evaluation, an understanding of their complexities and risks, and thoughtful integration aligned with your financial goals and values.

Working with a trusted, fee-only financial advisor who specializes in these areas can provide the guidance and clarity needed to navigate this space confidently. With the right approach, alternatives may help you achieve a portfolio that is both diversified and personally meaningful.

If you’re ready to discuss how to thoughtfully incorporate alternative investments into your portfolio, I offer the experience and personalized guidance you can rely on to navigate these complex opportunities with confidence and clarity.

Disclaimer: The blog post is for general informational purposes only. This article is not intended to be a substitute for specific financial, tax, or legal advice. Reproduction of this material is not permitted without written permission.