Understanding the growth of alternative investments


## **Introduction**

Alternative investments have been gaining significant traction among investors as they seek to diversify their portfolios and achieve long-term savings goals.

So, what exactly are alternative investments? In simple terms, they encompass a broad range of investment options beyond traditional stocks, bonds, and cash. Examples of alternative investments, often referred to as "alts," include hedge funds, crypto funds, venture capital, private equity, commodities, real estate, private debt, and art and collectibles. What sets alternative investments apart is their lower correlation to the broader market, offering investors a level of diversification and downside protection.

![A graphical representation of investment options including Privates (Equity, debt, and Nate), Hedge funds, Real estate, and Infrastructure](https://hedonova.b-cdn.net/Hedonova%20images/%20All%20Hedonova%20blogs/Understanding%20the%20growth%20of%20alternative%20investments/alternatives-global-aum-min.webp)

Another advantage of alternative investments is their potential to generate higher returns compared to traditional stocks and bonds. Private equity and venture capital, for instance, have shown returns of 22% and 25.8% respectively over the past five years, outperforming the S&P 500's 17.6% return during the same period. Despite the benefits, there are obstacles preventing everyday investors from participating in alternative investments. One major challenge is the accreditation requirement, which restricts access to individuals with high income or net worth. However, there is a growing need to reform investment legislation to make alternatives more accessible to a wider range of investors.

In addition to accreditation, high investment minimums pose another barrier for investors looking to enter the alternative investment space. Many funds require minimum investments of $1 million or even $5 million, making it difficult for smaller investors to participate. Lowering these minimums and creating accessible platforms for transactions can help bridge this gap and foster broader participation in alternative investments.

![Global Assets Under Management (AUM) CAGR Illustration](https://hedonova.b-cdn.net/Hedonova%20images/%20All%20Hedonova%20blogs/Understanding%20the%20growth%20of%20alternative%20investments/global-assets-under-management-min.webp)

## **Global growth of alternative assets**

As per [Preqin](https://www.preqin.com/future), all alternative asset classes will see significant growth in global AUM. Here’s how the projections break down from 2020 to 2025:

![Table showing Preqin's Projected Growth in Global AUM for All Alternative Asset Classes from 2020 to 2025](https://hedonova.b-cdn.net/Hedonova%20images/%20All%20Hedonova%20blogs/Understanding%20the%20growth%20of%20alternative%20investments/chart-min.webp)

According to projections, total alternative investments under management are expected to reach $17.2 trillion by 2025, a substantial increase from 2010. Institutional investors and ultra-high-net-worth families are driving this surge, with approximately 50% of their assets allocated to alternatives. Even billionaires have a higher percentage of their assets invested in alternatives, ranging from 51% to 54%.\
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Private equity is expected to experience rapid growth, both in terms of percentage and dollar value. It is projected to account for a larger share of alternative assets under management (AUM), increasing from 41% in 2020 to 53% by 2025. This growth can be attributed to strong performance and increased investments, as a significant number of surveyed investors (79%) plan to allocate more funds to private equity.

Private debt is also anticipated to see substantial growth. Private debt funds, with a higher risk appetite compared to traditional banks, may actively invest in emerging sectors like pharmaceuticals and remote working. These funds take on greater risks in anticipation of higher potential yields, which is particularly attractive to investors seeking better returns in a low-interest-rate environment.

Real estate is another asset class that investors are likely to turn to for its yield potential. Assets with long leases typically offer stable cash flows and rents that are indexed to inflation, making them an appealing option for hedging against inflation. However, the real estate industry's compound annual growth rate is projected to be the lowest among alternative investments due to uncertainties surrounding office and retail spaces following the impact of COVID-19.

## **5 reasons people invest in alternative assets**

### Diversification

Investing in alternative investments can help diversify your portfolio, which means spreading your investments across different types of assets. This can help reduce the risk associated with having all your investments in one type of asset.

### Potential for Higher Returns

Alternative investments have the potential to generate higher returns compared to traditional investments. For example, investing in real estate can provide rental income and the value of the property may appreciate over time. Similarly, investing in private companies through private equity can offer high returns if those companies experience significant growth.

### Uncorrelated to  Stock Market

Unlike traditional investments tied to the stock market, alternative investments are not influenced by its ups and downs. This can be beneficial during market downturns, as alternative investments may provide a buffer and help protect your portfolio from significant losses.

### Unique Investment Opportunities

Alternative investments offer unique opportunities that are not available in the stock market. For instance, investing in art or wine allows you to own a piece of history while potentially earning attractive returns.

### Protection Against Inflation

Certain alternative investments like commodities and real estate have the potential to provide protection against inflation. These assets tend to increase in value during times of inflation, helping to offset the impact of rising prices on your investment portfolio.


Alternative investments encompass various investment options beyond traditional stocks, bonds, and cash, offering diversification and potential for higher returns. Examples include hedge funds, private equity, cryptocurrencies, real estate, and art. Despite their advantages, barriers like accreditation requirements and high investment minimums limit access for everyday investors. Global AUM for alternative assets is projected to reach $17.2 trillion by 2025, driven by institutional investors and private equity growth. Investing in alternatives can provide portfolio diversification, protection from market volatility, and exposure to unique opportunities with potential for inflation protection.

Understanding the growth of alternative investments

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