It’s no secret that the ultra-rich have access to the best alternative investments, which are often unavailable to the average investor, such as expensive wine, fine art, and equity in private companies.
What may come as a surprise is just how much their portfolios are weighted towards these types of investments. Among ultra-high-net-worth investors (those with a net worth of at least $30 million), alternative investments make up 20% of assets, compared to almost 0% for the average investor.
Image source: Getty Images.
Read on to find out how the ultra-wealthy incorporate alternative investments into their portfolios.
What are alternative investments?
Alternative investments are investments in assets that are not part of the stock, bond, and currency markets. It’s a broad term that encompasses tangible assets, commodities trading, investments in hedge funds, and even digital assets. These types of investments are often chosen as a hedge against inflation and, of course, to maximize returns.
Examples of alternative investments
Since there are so many assets that fit the description of an alternative investment, here are some common examples:
- Private equity
- Real estate
- Hedge funds
- Private credit
- Rare whisky
- Art
- Watches
- Coins
- Cars
- Cryptocurrency
Alternative investment use among investors
For the everyday investor, alternative investments typically make up a small portion of their overall assets. Retail investors who fall into the mass affluent segment, whose incomes range from $100,000 to $1 million, have essentially no alternative investments, according to a study by Bain & Company. Individual investors overall own just 16% of alternative assets under management, with the rest owned by family offices and funds, according to a report from Georgetown University’s McDonough School of Business.
Among high-net-worth investors, it’s a different story. Alternative investments make up a larger portion of their assets than equities, according to a survey from global investing firm KKR.
KKR found that high-net-worth investors (those with a net worth of at least $1 million) allocated 28% of their assets to alternative investments in 2022, representing a 2% increase from 2020.
Family offices of high-net-worth investors, private companies that manage the assets of the rich, are increasingly tilted toward alternative investments. Alternatives compose 42% of the assets under management of family offices surveyed by KKR, while equities make up just 32%.
|
ASSETS |
High-net-worth, asset allocation as a percent of AUM |
Family offices, asset allocation as a percent of AUM |
|---|---|---|
|
Cash |
34% |
11% |
|
Alternatives |
28% |
42% |
|
Equities |
23% |
32% |
|
Credit |
15% |
15% |
Alternative investments as a response to volatility
One of the primary benefits of alternative investments is that they provide a means to diversify portfolios and mitigate stock market volatility, as well as offer a hedge against inflation.
Despite market volatility and red-hot inflation in 2022, the majority of investors adhered to their alternative investment strategy, according to the 2023 EY Global Wealth Research Report. Fifty-six percent made no change to their alternative investment approach, 27% added, and 17% invested less in alternatives.
|
INVESTMENT IN ALTERNATIVE INVESTMENT PRODUCTS IN RESPONSE TO MARKET VOLATILITY |
PERCENT OF INVESTORS |
|---|---|
|
More |
27% |
|
No change |
56% |
|
Less |
17% |
Asset allocation for high-net-worth families
High-net-worth family offices allocate 29% of their assets to listed equities, which comprise the largest portion of their investments, broken down by subgroup, according to KKR’s survey.
Private equity is next, with high-net-worth families allocating 27% of their assets to this type of alternative investment. And, like many Americans, they also allocate a portion (15%) of their assets toward investing in real estate and other tangible assets.
Family offices have pared their exposure to hedge funds since 2017 and equities since 2020. They’ve increased their allocation to real assets, which include real estate, commodities, natural resources, and equipment.
|
Asset Class |
2017 |
2020 |
2023 |
|---|---|---|---|
|
Public equities |
29% |
31% |
29% |
|
Liquid credit |
9% |
10% |
10% |
|
Private equity, venture capital |
24% |
27% |
27% |
|
Private credit |
6% |
4% |
4% |
|
Hedge funds |
12% |
6% |
6% |
|
Real assets |
11% |
13% |
15% |
|
Cash |
10% |
9% |
9% |
|
Asset class |
2017 |
2020 |
2023 |
Alternative investment portfolio allocation by net worth
Alternative investment ownership increases in proportion to wealth, according to Bain & Company. Ultra-high-net-worth investors allocate around 20% of their investments to alternatives, compared to almost 0% for mass affluent investors, and just 5% for investors with annual incomes between $5 million and $30 million.
|
Investor Segment |
Net Worth Range |
Allocation to Alternatives |
|---|---|---|
|
Mass-Affluent |
$100k – $1M |
~0% |
|
High-Net-Worth |
$1M – $5M |
1% – 2% |
|
Very-High-Net-Worth |
$5M – $30M |
~5% |
|
Ultra-High-Net-Worth / Family Offices |
$30M+ |
~20% |
Percentage of investors with alternative investments by region
North America is the region with the lowest usage of alternative investments. This is most likely due to the strong historical performance of the stock market, since investors don’t need to seek out alternatives to get a good return.
|
Region |
Current usage level of alternative investments |
Estimated usage level by 2024 |
|---|---|---|
|
Global |
32% |
48% |
|
North America |
18% |
27% |
|
Asia-Pacific |
37% |
61% |
|
Europe |
37% |
54% |
|
Middle East |
55% |
71% |
|
Latin America |
70% |
79% |
Percentage of investors with alternative assets by generation
Gen Xers are the most likely to have alternative investments, but that may not last much longer. The percentage of millennials who use alternative investments is expected to explode by 2024.
|
Generation |
Current usage level of alternative investments |
Estimated usage level by 2024 |
|---|---|---|
|
Millennial |
32% |
60% |
|
Generation X |
38% |
54% |
|
Baby boomer |
26% |
34% |
Satisfaction with alternative investments
Younger investors and wealthier investors are more likely to be satisfied with the performance of their alternative investments, according to new data from EY.
Sixty-three percent of the millennial clients EY surveyed are happy with how their alternative investments have performed, compared to just 40% of baby boomers.
When it comes to wealth, 45% of EY’s mass affluent clients are satisfied with the performance of their alternative investments, compared to 63% of very-high-net-worth clients and 69% of ultra-high-net-worth clients.
Overall, 48% of EY’s surveyed clients are satisfied with how their alternative investments have performed.
|
CLIENT TYPE |
PERCENT SATISFIED WITH PERFORMANCE OF ALTERNATIVE INVESTMENTS |
|
Millennial |
63% |
|
Gen X |
49% |
|
Baby boomer |
40% |
|
Mass affluent |
45% |
|
High net worth |
47% |
|
Very high net worth |
63% |
|
Ultra-high net worth |
69% |
|
All clients |
48% |
Performance data for alternative investments and the S&P 500
Private equity is the only alternative investment to outperform the S&P 500 (^GSPC +0.98%) in the last three and five years. Several indexes track major alternative investment classes, allowing comparisons of their performance over the years with that of more traditional investment options. No indexes included in The Motley Fool’s analysis outperformed the S&P 500 in 2024.
|
Index |
2024 |
Past 3 years (2022-2024 |
Past 5 years (2020-2024 |
|---|---|---|---|
|
S&P 500 |
15.1% |
21.6% |
14.5% |
|
Cambridge Associates U.S. Private Equity Index |
8.10% |
4.40% |
15.80% |
|
Cambridge Associates U.S. Venture Capital Index |
6.20% |
-6.40% |
15.10% |
|
Bloomberg Aggregate Bond Index |
1.25% |
-0.32% |
|
|
Cliffwater Direct Lending Index |
11.30% |
— |
9.55% |
|
NCREIF Property Index* |
0.60% |
3.13% |
5.66% |
|
Barclay Hedge Fund Index |
9.68% |
9.05% |
9.70% |
How luxury goods fare as alternative investments
The value of luxury goods has increased by 73% over the past 10 years, as reported by the Knight Frank Luxury Investment Index at the end of 2024.
Certain items perform much better than others. Rare whisky is the standout, with its value increasing by 191% over the past decade. On the other hand, jewelry and colored diamonds have recorded far more modest 10-year changes of 34% and 4%, respectively.
Despite the potential for appreciation, luxury goods normally don’t make up a large portion of wealthy investors’ alternative assets. There are several reasons for that:
- Luxury goods are illiquid. They can be expensive and time-consuming to buy and sell, even in small quantities.
- They’re risky and relatively unregulated. For example, counterfeit art is a long-standing problem, and sales are not always reported.
- Historical data for particular items can be lacking.
- Some luxury goods can incur significant costs over time, including maintenance and upkeep.
|
Category / Index |
12-Month % Change |
5-Year % Change |
10-Year % Change |
|---|---|---|---|
|
Whisky |
-9% |
-10% |
192% |
|
Furniture |
-3% |
61% |
141% |
|
Watches |
2% |
53% |
125% |
|
Handbags |
3% |
34% |
86% |
|
Knight Frank Luxury Investment Index |
-3% |
21% |
73% |
|
Cars |
1% |
30% |
59% |
|
Art |
-18% |
2% |
54% |
|
Coins |
2% |
24% |
48% |
|
Wine |
-9% |
8% |
37% |
|
Jewellery |
2% |
20% |
34% |
|
Colour Diamonds |
-2% |
5% |
4% |
Digital assets as alternative investments
Cryptocurrency hit the mainstream in 2020, but valuations throughout the sector have taken a significant hit, and several cryptocurrency exchanges have collapsed, casting doubt on its viability as an asset class.
Interest in cryptocurrency among high-net-worth individuals has plummeted. A 2022 survey from Knight Frank found that crypto accounts for just 2% of the portfolios of ultra-high-net-worth individuals. Based on that finding, crypto makes up a smaller percentage of the average ultra-rich portfolio than gold (3%) and alternative investments, such as art, cars, and wine (5%).
Crypto is also considered the riskiest and most volatile asset class by high-net-worth individuals, according to Frank Knight. And while 59% of ultra-high-net-worth individuals are interested in investing in art, just 34% believe the non-fungible token (NFT) market still has potential.
Alternative investments are poised for growth
Total alternative assets under management are projected to reach $29.2 trillion by 2029, according to Preqin, a firm that provides data and analytics on alternative investments. That’s more than a 6x increase from the $4.1 trillion in alternative assets under management in 2010 and nearly triple the value of alternatives under management in 2019.
Institutional investors plan to increase their alternative investments
The majority (81%) of the institutional investors surveyed by Preqin intend to increase their allocation of funds to alternative investments by 2025.
Just 3% intend to decrease their allocation to alternative investments in that time frame.
|
Institutional investors’ plans for allocations to alternative investments by 2025 |
Percentage |
|---|---|
|
Will increase significantly |
26% |
|
Will increase |
55% |
|
Will stay the same |
16% |
|
Will decrease |
2% |
|
Will decrease significantly |
1% |
Institutional investors’ plans for allocation to alternative investments by asset
Private equity is the best-performing alternative investment, and it’s also where institutional investors plan to invest more, with 79% saying they’ll increase their asset allocation by 2025, according to Preqin.
|
Institutional investors’ plans |
Private equity |
Private debt |
Hedge funds |
Real estate |
Infrastructure |
Natural resources |
|---|---|---|---|---|---|---|
|
Will increase significantly |
23% |
16% |
8% |
10% |
15% |
6% |
|
Will increase |
56% |
51% |
27% |
41% |
51% |
29% |
|
Will stay the same |
17% |
25% |
34% |
33% |
24% |
38% |
|
Will decrease |
3% |
6% |
19% |
13% |
6% |
19% |
|
Will decrease significantly |
1% |
2% |
13% |
2% |
3% |
8% |
From alternative to mainstream
With ultra-high-net-worth investors devoting a fifth of their portfolios to alternative investments, it’s clear that they’ve entered the mainstream among the wealthy. However, individuals with higher net worths have access to a wider range of investment options. What about alternative investments for retail investors?
Among fund managers surveyed by Preqin, 15% reported offering retail investors access to alternative investments and plan to expand these offerings in the future. Another 17% didn’t currently offer these investments to retail investors but planned to do so in the future.
Retail investors already have access to various types of alternative investments, including real estate, luxury goods, and cryptocurrency. Real estate investment trusts (REITs) have become a popular means for individual investors to access the real estate market. New alternative investment funds and platforms are emerging, offering the average investor the opportunity to invest in shares of fine wine, art, cars, and other high-value assets.
For retail investors seeking to diversify their portfolios with alternative investments, an increasing number of options are becoming available. For the ultra-wealthy, alternative investments are likely to remain an extremely popular investment option.
Sources
Jack Caporal has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.