Many portfolios are built with the investments that are easiest to access, leaving out a range of potential opportunities for added diversification*.
For decades, alternative investments have expanded how institutions approach portfolio construction, offering a level of exposure beyond traditional public markets often inaccessible to individual investors. But advancements in tools, policy and sentiment are drawing increased interest in alternatives, with investors looking to understand how they can be incorporated into a well-rounded portfolio.
Incorporating alternative investments into a portfolio is less about replacing stocks and bonds and more about expanding the set of tools investors use to pursue long-term objectives. As public markets have become more efficient and, at times, more correlated, many investors are looking beyond traditional assets to access a broader range of return drivers and risk exposures.
Institutional portfolios have long leveraged this strategy. Industry research shows that large pensions, endowments and foundations often allocate a meaningful portion of their portfolios to alternative investments, underscoring the role private markets can play alongside public equities and fixed income.¹ While individual investors face different liquidity, regulatory and access considerations, the underlying portfolio construction principles remain relevant.
Rather than viewing alternatives as a single allocation, it may be more useful to consider how different alternative asset classes can function within a diversified portfolio.
*Diversification does not guarantee a profit or protect against a loss in a declining market. It is a method used to help manage investment risk.
Portfolio objectives and the role of alternative investments
Effective portfolio construction begins with clarity around objectives. While priorities vary by investor, common goals typically include long-term growth, income generation, diversification, and managing exposure to inflation or changing market conditions.
Alternative investments may align with one or more of these objectives depending on asset class, structure and strategy. Outcomes can vary widely, however, and alternatives are best evaluated based on how they complement existing holdings rather than as standalone solutions.
While no single investment serves every objective, alternatives are commonly evaluated based on whether they are primarily oriented toward long-term growth, income generation, or diversification relative to traditional public markets. Understanding these distinctions can help clarify how different alternative investments may fit within a broader portfolio.
Growth-oriented alternative investments
Certain alternative investments are commonly associated with long-term capital appreciation, often driven by factors like business expansion, operational improvements, or structural trends within private markets.
Private equity and venture capital involve investing in private, non-traded companies at various stages of development from seed to pre-IPO. Capital is typically committed for extended periods, and returns are often realized through exit events rather than ongoing distributions. Private equity has historically played a significant role in institutional growth allocations, though results vary widely based on vintage year, sector and manager selection.²
Income-focused alternative investments
Some alternative strategies emphasize income generation rather than price appreciation, though income levels are not guaranteed and may fluctuate over time.
Private credit strategies involve lending to companies or projects outside public bond markets, with returns generally tied to interest payments, borrower credit quality, and loan structure. The private credit market has expanded in recent years as banks have reduced certain types of lending, increasing demand for non-bank sources of capital.³
Income-producing real assets, such as rental real estate or infrastructure, may generate cash flow through leases, contracts or usage fees. Performance depends on operating efficiency, financing terms, and broader economic conditions.
Diversification and inflation-aware alternative investments
Diversification is a common motivation for allocating to alternative investments, particularly during periods when traditional asset classes move more closely together.
Hedge funds use a range of approaches, including long/short equity, relative value, and macro strategies. While objectives differ by strategy and manager, many seek to introduce return drivers that are not solely dependent on equity market direction, though correlations can change across market environments.⁴
Commodities, digital assets, and certain real assets provide exposure to markets beyond traditional equities and bonds. These assets can be volatile and are influenced by factors such as supply and demand dynamics, technological developments, and regulatory changes. Historically, real assets have been included in portfolios as part of broader inflation-aware strategies, though effectiveness varies by structure and economic conditions.⁵
Building a diversified portfolio across retirement and non-retirement accounts
A common challenge in portfolio construction is evaluating retirement accounts and non-retirement accounts separately rather than as parts of a unified strategy. While accounts may differ in tax treatment, rules, and liquidity constraints, risk and market exposure exist across the entire portfolio regardless of where assets are held.
A holistic approach considers all investable assets together, including retirement accounts, taxable brokerage accounts, and other savings vehicles. Viewing the portfolio in aggregate can help investors better understand overall exposure to public markets, private markets, and illiquid investments, as well as identify unintended concentrations or gaps in diversification.
Private market allocations may be held in both retirement and non-retirement accounts depending on structure, tax considerations, and liquidity needs. For example, longer-term, illiquid investments may align well with retirement assets not intended for near-term spending, while more liquid or income-oriented strategies may be better suited to taxable accounts. The objective is intentional coordination across the full portfolio rather than uniform allocations within each individual account.
Coordinating alternative investments across account types
When alternatives are considered across accounts rather than in isolation, investors can more deliberately align different asset classes with their intended role and time horizon. This coordination can help balance growth, income and diversification objectives while accounting for practical considerations such as access to capital, tax efficiency, and future cash needs.
Importantly, diversification should be evaluated at the portfolio level - not the account level. A portfolio that appears diversified within individual accounts may still be heavily concentrated in a single asset class or risk factor when viewed as a whole.
The role of self-directed IRAs in private market access
Self-directed IRAs may provide one pathway for accessing alternative investments within a retirement framework, particularly for investors seeking to align long-term private market exposure with tax-advantaged growth. By offering an expanded range of permissible investments, self-directed IRAs enable retirement capital to be allocated toward asset classes like private equity, private credit, real assets, and other alternatives.
At the same time, SDIRAs represent just one component of a broader portfolio strategy. Decisions about whether to hold alternative investments in retirement accounts, non-retirement accounts, or both should be made in the context of the full asset mix. Key considerations include liquidity needs, tax treatment, regulatory requirements, and future distribution obligations, including required minimum distributions.
As with all alternative investments, incorporating them within retirement accounts requires careful planning, ongoing evaluation, and a clear understanding of how each allocation supports long-term portfolio objectives.
Considerations for using alternative investments in portfolios
Alternative investments can broaden the opportunity set available to investors by offering exposure beyond traditional public markets. Their effectiveness within a portfolio depends on how they are selected, structured, and integrated alongside other assets, as well as an investor’s individual goals and constraints.
Given their complexity and risks, alternative investments are most suitable for sophisticated investors with a long-term perspective. When approached thoughtfully, alternatives can offer meaningful portfolio diversification as part of a well-rounded financial strategy.
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