The Rise of Alternative Investments: A Look at the $13.7 Trillion Industry

The world of alternative investments is booming, with assets under management reaching $13.7 trillion in 2021 and projected to nearly double to $23.3 trillion by 2027, according to Prequin analysts. While the ultrarich have traditionally allocated at least 50% of their assets to alternative investments, more and more average people are also exploring this avenue for potential profits.

Alternative investments differ from traditional forms like bonds, stocks, and cash in that they are usually illiquid and not easily convertible to cash. These investments can include real estate, precious metals, hedge funds, distressed securities, and private equity. The lack of regulation by the SEC means that these investments were once only accessible to institutional and ultrarich investors, but now individual and retail investors are incorporating them into their portfolios.

One key feature of alternative investments is their low correlation with traditional assets, meaning they are less influenced by factors affecting conventional asset prices. Valuing these assets can be complex, requiring specific knowledge and expertise, especially for assets like fine art where demand patterns can be unpredictable.

Private equity, private credit, real estate, and hedge funds are some of the key areas of alternative investing. Private equity has a history of generating strong returns but faces challenges due to interest rate fluctuations. Private credit is becoming more attractive as banks tighten lending standards. Real estate remains stable across multiple sectors, with opportunities in data centers, life science offices, and single-family homes. Hedge funds offer active returns but are typically only accessible to institutional and wealthy investors.

Current trends in alternative investing include democratization, with more investors gaining access to opportunities through crowdfunding and private lending. Investors are also looking for unique opportunities, such as buying properties during market downturns. Additionally, investors are backing adaptable companies that can navigate technological changes successfully.

As the alternative investment market continues to grow, investors of all backgrounds are exploring new opportunities to diversify their portfolios and potentially maximize profits in this ever-evolving landscape.