Alternative investments: an evolving role
From private credit to infrastructure, alternative investments help smooth portfolio returns over time.
Alternative investment strategies are gaining ground. By drawing on diversified sources of return and income, they help reduce a portfolio’s overall risk in an uncertain macroeconomic environment.
While balanced portfolios have historically delivered solid results, today’s market volatility makes returns less predictable and is prompting investors to seek out new avenues of diversification.
When the movement of a stock is no longer offset by that of a bond, the question is less about which assets to buy than about how investments can work together to keep a portfolio steady, even when markets swing sharply.
A solution that’s gaining ground
This shift has been underway for more than a decade. In private credit, for instance, the rise in its use dates back to the global financial crisis of 2007–2008, when tighter rules curbed bank lending and steered borrowers toward non-traditional sources of financing.
What first served as a workaround has since become a mainstay. According to alternative investment data provider Preqin, total global private debt assets climbed from US$232 billion in 2007 to US$1.9 trillion in 2023, pointing to a trend that reaches well beyond a single market cycle.
Within portfolios, the appeal lies less in access to niche assets than in how those assets behave. Real estate, infrastructure and private credit are generally anchored in contractual cash flows or underlying business activity rather than in daily price discovery.
This difference stands out most in strained macroeconomic conditions. In those moments, publicly traded securities can reprice quickly, and often in lockstep. Alternative investments, on the other hand, tend to adjust more gradually, with valuations shaped by underlying cash flows and periodic appraisals rather than by continuous market trading.
These cash flows are what set them apart. Investing in a toll road, for example, generates a daily stream of revenue. It’s that steady income that stabilizes a portfolio’s return, making it less sensitive to the day-to-day swings seen on the stock market.
An institutional pillar, now more accessible
For a long time, these traits kept alternative investments largely within institutional portfolios, where long investment horizons and limited liquidity needs made them easier to hold.
Historically, large pension plan managers have turned to these investments for their quality. Today, smaller investors are gaining more and more access to them.This wider access stems in part from product design. Alternative investments are increasingly built into diversified solutions such as target-date funds, putting them within reach of investors without requiring them to manage their own asset mix.
Beyond their greater availability, the growing use of alternative investments also reflects a rising awareness that their role in portfolios is becoming harder to replicate with traditional assets alone.
Folding alternative investments into existing fund structures, rather than treating them as standalone solutions, makes them more accessible to investors. At iA, for example, they’re built right into our turnkey solutions.
Risk, revisited
Alternative investments don’t necessarily mean higher returns. Instead, they aim for a better return for a given level of risk. It’s a subtle but important distinction. Alternative investments shouldn’t be expected to outperform in every market condition; their contribution is measured over time, through a mix of steadier income and lower volatility.
In practice, that often means fewer sharp drops, even if returns look more modest when equity markets are climbing strongly. Over longer periods, that consistency can improve overall portfolio returns.
As the use of alternative investments grows, so does their complexity. Returns, however, remain cyclical. The 2022 real estate downturn, driven by rising rates and inflation, showed that alternative investments aren’t immune to economic conditions.
Manager selection remains essential. There’s no consistent evidence of outperformance, but process and discipline continue to set results apart. That’s why it pays to favour a sound process.
Often described as a trend, the use of alternative investments shouldn’t rest solely on broadening the range of products that include them, but also on how they’re woven into portfolios built for a wide base of investors. For longer-term investments, it comes down to diversification and risk-adjusted returns.
Alternative investments don’t eliminate uncertainty. They change how and when that uncertainty is managed within a portfolio.