The Growing Popularity of Alternative Investments

November 16, 2022

Alternative investments long lived on the periphery of the global investment landscape, but have recently made their way into the mainstream. In just 15 years, alternatives have grown from 6% to 14%, making $13.4 trillion of the global market in 2018, and they’re expected to grow between 18-24% by 2025.

This rapid growth is largely driven by high-net-worth individuals, as well as institutional investors such as pension funds and endowments looking for diversification and return opportunities.

In recent years, however, there has been even more of a push from retail investors to gain exposure to alternative assets.

What Are Alternative Investments?

Alternative assets refer to any investment that falls outside of traditional asset classes. This is a large umbrella term that covers many assets including real estate, commodities, collectibles such as fine art, cryptocurrency and many more.

Traditional investments are typically traded on public markets, where corporations sell shares to the public via stock exchanges.

On the other hand, alternative asset classes are typically more complex, less uniformly regulated, and can have varying levels of volatility and transparency. This is why, historically, alternatives have only been held by institutional or accredited investors.

This asset class is broad and includes many types of investment opportunities, all of which have varying characteristics. There are some common traits of most alternatives, including:

  • Relatively Illiquid: Many alternatives are real assets, meaning they are tangible items such as real estate or a piece of Contemporary artwork. The long time horizon of these assets along with the lack of a centralized secondary market can make the quick sale of alternatives difficult if an investor is trying to get out of the market.
  • Low correlation to the stock market: Unlike traditional investments, alternatives typically offer a low or even negative correlation to public markets because they source returns differently. This means that the asset value of alternatives isn’t dependent on the values of other asset classes.
  • Varying levels of regulation by the US Securities and Exchange Commission (SEC): Many alternative investments have fewer regulations from the SEC, generally because the investor profile of alternative investors is more sophisticated than traditional assets. However, the degree of regulation and due diligence varies across different alternative assets.

Some of the most popular types of alternative investments include:

  • Real Estate & Real Estate Investment Trusts (REITs)
  • Private Equity & Private Debt (this includes growth equity, venture capital, and buyouts)
  • Hedge Funds
  • Commodities & Natural Resources
  • Collectibles
  • Cryptocurrency

The Rise in Popularity of Alternative Investments

As mentioned previously, alternative assets were held almost exclusively by ultra-wealthy and accredited investors. Originally introduced in 1852 when investments were made into the building of the Transcontinental Railroad, alternative assets have developed and expanded greatly since then.

Impact of the 2008 Global Financial Crash

Alternatives began to gain popularity among retail investors after the 2008 financial crisis. After public markets crashed, investors relying exclusively on the stock market lost out big time and began looking for non-traditional assets. They hoped this would help diversify their portfolios and lead to higher returns.

First, many public companies went private following the recession. This expanded private market investment options, making them more accessible and more attractive to investors who may have not considered alternatives before.

Secondly, more investors were shifting from active investing to a passive investment strategy. Assets like stocks and bonds are highly liquid and fluctuate in value nonstop. Active investing requires consistent tracking of market volatility to make the decision of when to buy and sell.

Alternatives, unlike stocks, typically have a much longer time horizon and are typically far less liquid, meaning there isn’t much an investor can do other than hold it. Even for private equity and private debt, there are fund managers making investment decisions for your capital, meaning the day-to-day tracking isn’t up to the individual.

This can help to provide some peace of mind for investors that they aren’t missing the bottom or peak of a stock’s value.

Alternative Assets in 2022

Since 2008, alternative investments have only become more popular. There have also been new alternatives introduced to the market that have garnered a lot of attention.

According to a 2022 Preqin report, the global market for alternative investments is estimated to reach $23.31 by 2026. This is up from an estimated $13.32 trillion at the end of 2021.

Increased Allocation to Alternative Investments

A Cerulli Associates poll of more than 100 financial advisors found that asset managers kept around 15% of their investments in alternatives in the first half of 2022, up 10% year-over-year.

All advisors polled said they intend to increase that allocation to nearly 20% of invested capital over the next two years.

Allocation to alternatives is most common amongst the wealthiest investors. According to a KKR survey of ultra-high-net-worth family offices, more than half of investors with more than $1 billion in assets keep at least half of their investable wealth in alternatives.

Younger Investors Turning to Alternative Investments

A 2022 Bank of America Private Bank Study found that 80% of investors between the ages of 21 and 42 have looked to alternative investments. They allocate three times as much of their investment portfolios to alternative investment strategies (16%) and half as much to stocks (25%) compared to older investors (5% and 55% respectively).

In fact, 73% of young investors said they do not think it’s possible to get above-average returns from a traditional stocks and bonds portfolio. However, only 32% of investors over the age of 43 think the same.

This generational shift indicates that alternative assets are likely going to continue growing. A 2022 Cerulli study found that $84 trillion is expected to pass from baby boomers to Gen X and millennials through 2045, meaning a generational shift in investment management could have significant impacts.

Why Have Alternative Assets Risen in Popularity?

Multiple economic recessions, rapid technological development and a global pandemic have all significantly impacted the investment landscape and investor behavior. Today’s stock market is more volatile than the stock market of decades past.

These global events and the rise of volatility have helped alternative investments move into the mainstream.

Potential for Higher Returns

Compared to traditional assets, alternatives are less dependent on general market trends to see higher returns. While there is no guarantee of returns, and an investment in alternatives may be riskier, there is potential for generous yields when investing in alternatives.

This is especially true when markets are experiencing large downturns. Alternatives historically outperform stocks and bonds during recessions and during periods of high inflation.

Portfolio Diversification

The Cerulli study mentioned above found that the main reasons investors were allocating more to alternatives included reducing exposure to public markets (70% of respondents) and providing downside risk protection (66%).

Other top reasons were portfolio diversification, income generation and capital appreciation. Today, more and more financial advisors and wealth management firms are recommending a higher allocation to non-correlated assets in order to protect returns from volatility.

Non-correlated assets help your portfolio by spreading out the risks that could negatively impact your returns. For example, returns seen from Contemporary Art investments have very little correlation to returns seen from equity investments because their values are derived from different factors.

During a general market downturn, having investments across multiple asset classes can help to mitigate the drop in asset price.

Introduction of New Assets

At first, alternative investments were just railroads. Later, private equity and real estate entered the conversation. Today, there seems to be a new crypto coin announced every day. As technology has advanced, new assets have been introduced to a growing group of investors.

Most commonly discussed would be cryptocurrency and NFTs. These digital assets have created an entire new investment landscape.

Along with new technology, there has been a rise in retail investors. Fractional shares have become more popular, as well as fractional shares of commodities and collectibles such as real estate, classic cars and Contemporary Art.

This has removed historic barriers for retail investors to engage in previously unattainable markets, increasing the amount of capital under management.

Invest in Alternative Assets with Masterworks

The alternative assets landscape has grown immensely in recent years, in part because of the introduction of new assets. Masterworks, for one, is the first company to open the Contemporary Art market to retail investors by offering fractional shares of blue-chip artworks.

Investors can purchase $20 shares of multi-million dollar works of art from some of the world’s most sought-after artists such as Jean-Michele Basquiat, Cecily Brown, and Banksy

If higher fees and higher barriers to entry have deterred you from investing in alternative assets, Masterworks can be a great entry point to the world of art investing.

Masterworks’ industry-leading research and acquisition teams use proprietary data and market expertise to curate a collection of iconic works of Contemporary Art.

See important Regulation A disclosures:

This material is provided for educational purposes only.  It is not intended to be investment advice. Any examples discussed are purely hypothetical and do not reflect any actual investments

Masterworks is a fintech company democratizing the art market. Our investors are able to fractionally invest in $1mn+ works of art by some of the world's most famous and sought-after artists.