For decades, alternative investments have quietly played a significant role in institutional portfolios and private wealth strategies.

Yet many individual investors still have little, if any, exposure beyond the traditional public markets of stocks and bonds, leaving important questions about what alternatives are, how they work, and where they fit within a portfolio. 

So what exactly are alternative investments, and how do they differ from the traditional assets? At its core, the term “alternative investments” refers to any investment asset that exists outside the conventional trio of stocks, bonds and cash equivalents. Alternatives span a wide range of assets, including real estate, private equity, hedge funds, managed futures, cryptocurrencies, and private credit, each offering different diversification, liquidity, and risk-return characteristics.

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Traditional vs. alternative investments

Gaining a deeper understanding of alternative investments starts with a clear comparison to traditional public market assets.

Public markets, which include stocks, bonds and other securities traded on exchanges such as the New York Stock Exchange or Nasdaq, are characterized by high liquidity, transparent pricing and regulatory oversight. Investors can typically buy and sell shares at any time during trading hours, with prices determined in real time based on market demand. These investments are familiar to most individual investors and form the foundation of most retirement accounts like 401(k)s and IRAs.

By contrast, many alternative investments are not traded on public exchanges and are typically valued periodically rather than in real time, with liquidity that differs from public markets.This difference stems from the nature of the assets themselves (private companies, physical goods or digital assets) and the structures through which they are marketed. For example, private equity stakes in a startup aren’t priced daily on a public exchange, and selling that stake before an exit event can be difficult. 

As a result, alternative investments tend to have different risk considerations than public market assets, including longer investment horizons, less frequent pricing, more complex tax treatment, and higher minimum investment requirements. These same structural characteristics may lead to distinct performance patterns and diversification benefits that public markets may not provide. 

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Characteristics of alternative investments

Alternative investments often share certain characteristics that distinguish them from traditional public market assets, though these features can vary by asset class and strategy.

Low correlation with traditional markets

Many alternatives have historically exhibited return patterns that differ from those of  stocks or bonds, which means they may not move in lockstep with public markets. Depending on market conditions and strategy, this difference may help smooth overall portfolio volatility when traditional markets fall. 

Illiquidity

Many alternative investments are less liquid than public market assets and may not have an active secondary market. As a result, capital is often committed for extended periods, which can limit an investor’s ability to access funds before a liquidity event. While some investors associate illiquidity with different return expectations, reduced liquidity also increases risk and may not be suitable for all investors.

Complex valuation and transparency

Unlike publicly traded securities with readily available market prices, alternative investments are often valued periodically using models, appraisals, or other methodologies. This can make valuation less frequent and performance more difficult to assess or compare over time.

Active management and specialized expertise

Many alternative investment strategies, such as private credit or hedge funds, involve active management and rely on specialized expertise. Outcomes may vary significantly based on manager approach, market conditions, and execution, and active management does not guarantee positive results.

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Key asset classes within alternatives

Alternative investments are not monolithic. They include numerous asset classes and strategies, each with a unique with its own risk and return characteristics:

• Private equity & venture capital: Investments in private, non-traded companies from early-stage startups to established firms. These strategies may offer high growth potential but carry significant risk and long holding periods. 

• Real assets: Tangible or physical assets such as real estate, infrastructure, and natural resources. These assets may generate income and serve as a hedge against inflation depending on structure and market conditions, but they often require specialized knowledge and can be expensive to maintain. 

• Hedge funds and alternative strategies: These funds employ diverse tactics including  long/short equity, arbitrage, and macro strategies, aimed at generating returns that are less correlated with standard markets. Their objectives and risk profiles vary widely by strategy and manager, and results may differ across market environments.

• Commodities and digital assets: Commodities like oil and metals, and newer classes such as cryptocurrency, introduce exposure to markets beyond equities and bonds. These assets are often associated with higher volatility and evolving regulatory considerations

• Collectibles and specialty investments: Items such as art, wine, and rare collectibles fall under alternatives. The addition may add portfolio  diversification but often lack formal markets or clear liquidity, which can increase complexity and risk. 

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Why alternatives are on the rise

Interest in alternatives has continued to rise. According to recent research from Alto, as of 2025, 45% of Alto investors already allocate at least 10% of their portfolios toWhy Alternatives Are No Longer Optional | Alto IRA alternatives, with an additional 33% intending to follow suit. Several trends are contributing to this increase:

• Diversification benefits*: Because many alternative assets typically have lower correlation with stocks and bonds, they may provide enhanced portfolio resilience and potentially mitigate losses during market downturns. 
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  *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.

• Potential for meaningful returns: Some alternatives like private equity or venture capital may produce returns not typically available in public markets, though with greater risk and uncertainty. 

• Access to unique growth opportunities: Alternatives let investors participate in emerging industries and early-stage companies, providing exposure that traditional markets may not offer. 

• Evolution of investor access: Platforms and financial products are making alternatives more accessible to a broader range of investors, who meet applicable eligibility requirements, including via retirement accounts like self-directed IRAs that allow investment in private assets. 

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It’s important to be aware that investing in alternatives presents unique risks, including loss of capital, that investors should keep in mind. 

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How investors can access alternative investments

Access to alternatives has historically been limited to institutional or high-net-worth investors due to regulatory, capital and expertise barriers. But rising awareness private market investment vehicles is helping to widen access:

Self-directed IRAs (SDIRAs)

Investors can use self-directed IRAs to hold private equity, real estate, cryptocurrency and other alternatives within a tax-advantaged account.*

*Tax advantages associated with IRAs depend on the type of IRA (Traditional or Roth) and the investor’s individual tax situation. Self-directed IRAs do not provide additional tax benefits solely by virtue of being self-directed.

Feeder funds and fund platforms

These vehicles pool capital from multiple investors to access institutional-quality private funds typically with lower minimums. 

Interval and tender offer funds

These SEC-registered structures invest in illiquid assets but provide periodic liquidity windows, balancing access and long-term investing. 

Crowdfunding and special purpose vehicles (SPVs)

Newer structures allow investors to participate in specific private deals or startups with lower capital thresholds, though such offerings vary widely in quality and risk. 

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Risks and considerations

While alternative investments may offer compelling benefits, risks are omnipresent. Illiquidity can lock up capital for years, valuations may be opaque, and downside outcomes, including total loss of capital, are possible. Higher fees, complex taxation,and limited regulatory oversight further underscore the need for thorough due diligence and alignment with long-term goals and risk tolerance before committing capital. 

Alternative investments represent a broad, dynamic category of assets beyond the traditional investment framework. They can play a powerful role in diversification and growth strategies, especially as access improves for individual investors. But their complexity and inherent risks demand careful analysis, professional guidance and a thoughtful match to one’s financial goals before getting started.