Alternative investments like private equity, hedge funds, and real estate are becoming increasingly popular for investors looking to diversify their portfolios. New York Life Investments, with over $650 billion in assets under management, offers a range of alternative investment solutions. In a Markets in a Minute segment, they explained how alternative assets are defined and projected to see significant growth globally from 2020 to 2025. With lower correlation to public markets and potential for outsized returns, it’s clear why investors are allocating more capital to alternatives.
Private equity and private debt projected to see robust growth
The alternatives category includes private equity, private debt, hedge funds, real estate, infrastructure, and natural resources. Private equity is expected to grow the fastest, with compound annual growth of 14% from 2020 to 2025. Investors are attracted to the strong performance and capital flows, with 79% planning to increase allocations. Similarly, private debt is poised for significant expansion as funds target higher-risk, higher-return opportunities like biotech and remote working where banks are hesitant to lend.
Real estate presents stable cash flows despite pandemic uncertainty
Real estate is also drawing investor attention given the potential yield. Long-term leased assets often provide consistent cash flows and indexed rentals, making real estate an inflation-hedging asset class. However, office and retail face uncertainty post-COVID, contributing to real estate having the lowest projected CAGR at 9%.
Increasing opportunities for individual investors
Alternatives have historically only been available to institutional investors. However, recent SEC regulatory changes mean private markets will open up to individual investors if they meet certain standards. With portfolio diversification, lower correlation to public markets, and potential for market-beating returns, alternatives present compelling opportunities. Research shows private equity was the top performing asset class for public pensions from 2010-2020 based on median annualized returns.
As New York Life Investments’ predictions show, investor interest in alternatives is growing. While stocks and bonds may still be portfolio anchors, alternatives can help investors expand their horizons.