For high-net-worth (HNW) individuals, managing wealth effectively requires more than traditional investments such as stocks and bonds. As financial markets evolve, many wealthy investors are increasingly looking to alternative investments to achieve higher returns, diversify their portfolios, and reduce exposure to market volatility. According to Statista, asset allocation for HNW earners was divided up almost equally among alternative investments, real estate, fixed income, cash and cash equivalents, and equity in 2024.
This guide explores the world of alternative investments, specifically focusing on private equity, hedge funds, and real assets, and discusses how these can be valuable additions to a well-rounded investment strategy.
Alternative investments are considered assets that fall outside the realm of traditional stocks, bonds, and cash. This category includes private equity, hedge funds, real assets, and other non-traditional options.
For HNW individuals, these investments offer opportunities to access unique and often lucrative markets that can help achieve higher returns, lower risk through diversification, and exposure to emerging industries. Low interest rates and market uncertainty may push investors to look beyond transitional assets.
Private equity includes investments in companies not listed on public stock exchanges, and it offers a range of opportunities for involvement. For HNW individuals, entering the private equity market often requires significant capital, with minimum investments that can range from $250,000 to several million dollars. Additionally, investors may need to meet accreditation requirements set by regulators. Private equity investments are also considered illiquid, meaning they lock up funds for several years.
Three major types of private equity investments include the following:
This strategy involves acquiring established companies, often with a combination of debt and equity, with the goal of improving operations and selling the business for a profit later on.
Investors in venture capital provide funding to early-stage, high-growth potential companies, typically in industries like technology or biotech. These investments come with greater risk and a bigger potential in earnings.
Capital is provided to established businesses looking to expand or enter new markets. This funding allows the business to grow without giving up too much control.
Hedge funds are another popular form of alternative investment. They aim to profit in both rising and falling markets, often using specific techniques to manage risk and maximize returns.
Hedge funds are typically structured with management fees (1-2% annually) and performance fees (usually around 20% of profits), which can be substantial. Many hedge funds can also impose lock-up periods, meaning investors cannot access their capital for a set time.
Common hedge fund strategies include the following:
This approach involves buying undervalued stocks and shorting overvalued ones, betting that the price discrepancy will correct over time.
Investors using this strategy bet on global economic trends such as interest rate changes, currency movements, and commodity price shifts.
Hedge funds may take advantage of corporate events like mergers, acquisitions, or bankruptcies, profiting from these market-moving occurrences.
Real assets offer an alternative to traditional financial investments by investing in tangible, physical assets. This category includes commercial real estate, infrastructure, and natural resources. Each has the potential to serve against inflation and provide steady income streams.
Real assets can be accessed through various vehicles such as direct ownership, private REITs (Real Estate Investment Trusts), or infrastructure funds.
However, they require careful consideration of valuation dynamics, market fluctuations, and regulatory changes. Investors should ensure they fully understand each of the unique risks involved before making any final decisions.
When incorporating alternative investments into a portfolio, HNW individuals need to balance their risk tolerance, investment horizon, and financial goals. A well-thought-out allocation strategy is key to making alternatives work for your unique situation. Since these assets tend to be less liquid, investors must also plan for potential cash flow needs and ensure they are comfortable with longer-term capital commitment.
Effective risk management is essential when working with alternatives. Investors should diversify across multiple types of alternative assets to avoid overexposure to any single market or sector. Additionally, the due diligence process shouldn’t be rushed as investors need to understand the specific risks, expected returns, and the operational aspects of each investment before committing.
Written by: Taylor Bushey
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Advisor in the states of California, Oregon, and Texas. Reference to registration does not imply any particular level of qualification or skill. Investment advisory services available only in jurisdictions where ProCore Advisors is appropriately registered. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any securities.
