Before we discuss alternative investments, it’s worth noting an important shift in the investment landscape: public markets have contracted, and significantly so.
Research indicates that the number of publicly traded U.S. companies has roughly halved over the past two decades. This isn’t mere coincidence—it’s a fundamental shift in how businesses approach capital.
Companies are strategically choosing to remain private longer, which means their most dynamic growth phases often occur well before they ever appear on a public exchange. Some high-performing enterprises have no intention of going public at all.
For sophisticated investors, focusing exclusively on public markets means potentially missing an entire universe of opportunity.
This is precisely where alternative investments can play a significant role in a sophisticated portfolio. Beyond just private equity and debt, the alternatives ecosystem encompasses a diverse array of strategies—from hedge funds and venture capital to real assets like infrastructure, farmland, and commercial real estate.
I often describe alternatives as the essential “third leg of the stool.” When thoughtfully integrated, alternatives complement traditional public equities and fixed income to create a more structurally stable portfolio. This strategic advantage explains why alternatives have become a cornerstone for institutional investors like university endowments and sovereign wealth funds.
Yet, despite their compelling benefits, individual investors—even those with significant wealth—have been comparatively slower to incorporate alternatives into their wealth strategy. This presents both a challenge and an opportunity for families seeking to preserve and grow their wealth across generations.
Why consider alts?
Alternatives have some compelling advantages.
First, they can provide diversification through low correlation* with traditional investments. In other words, they don’t tend to move in lockstep with stocks or bonds. During periods of volatility, that can help smooth returns and reduce portfolio swings.
*Correlation, in this context, measures how investments move relative to each other. Assets with low or negative correlation don’t rise and fall together, which can help balance a portfolio.
Second, some alternative strategies have historically outpaced public markets. Private equity, for example, has outperformed the S&P 500 in different periods over the last 20 years.
Third, alternatives can provide exposure to innovative sectors and companies that are still in their early, high-growth years. Because companies today stay private longer, investors in private equity, venture capital, and other alternative strategies can access opportunities that aren’t available through the public markets alone.
Finally, alternatives can provide a psychological buffer during market volatility.
Unlike publicly traded investments, many alternatives are not priced daily. This lack of constant valuation can help investors stay focused on long-term goals rather than reacting to short-term market swings.
Nonetheless, alternatives remain surrounded by misconceptions that can prevent investors from leveraging these powerful tools.
Common misconceptions of alternative investments
Costs:
The first reaction I hear from clients exploring alternatives is sticker shock. Some alternative investments do carry higher fees—typically between 1% to 2% of assets under management plus a performance fee of 10% to 20% of profits.
However, this isn’t universally true. Mutual and exchange-traded funds that offer alternative strategies are typically prohibited from charging performance fees, although their expenses are higher than most other mutual funds and ETFs.
Transparency:
Transparency is another common concern. Unlike buying shares of Apple or Nvidia through a brokerage account, alternatives typically involve hiring managers to execute strategies through more complex structures. Managers usually disclose their investments quarterly, offering a limited view into their holdings.
Unrealistic expectations:
Some investors also have inflated expectations about alternatives based on stories they’ve heard, usually from a boastful relative around the Thanksgiving table. These anecdotes create misconceptions about the role alternatives should play in a sophisticated portfolio.
Are alternatives right for me? In what ways?
When we explore alternatives with you here at Waddell & Associates, we focus on how these assets might enhance your overall wealth strategy. This evaluation centers around several key dimensions:
Investment Time Horizon
Some alternative investments, like typical drawdown structure private equity, require commitments of 7-10 years or longer—an important consideration we explore in depth:
How does this timeline align with your wealth transition plans? Will these funds need to be accessible during a particular life season?
If you have multi-generational wealth objectives, longer-term alternative investments can serve as ideal vehicles for wealth earmarked for future generations.
Liquidity Strategy
We also examine a client’s comprehensive liquidity profile:
How might periodic or limited access to these funds affect your lifestyle needs and other financial objectives?
Rather than simply asking if clients are comfortable with illiquidity, we help visualize specific scenarios where limited access might impact plans, then develop strategies to address those potential situations.
Portfolio Integration
Alternatives should complement your existing investment approach, not dominate it. We consider:
How do these alternatives interact with your current holdings? What exposures are you seeking to enhance or minimize?
The W&A Approach
Remember, our conversations about alternatives are simply one aspect of our broader strategic partnership. As we explore these opportunities together, we’ll continue to place them in context with your complete wealth picture—ensuring any decisions align with both your long-term vision and near-term priorities.
New here? Learn about the Waddell & Associates difference and explore how you can work with us. We’d love to hear from you.
Matt Gentzkow is an Investment Strategist with Waddell & Associates
Sources: Commonfund.org, FSInvestments.com, Credit-Suisse.com
This communication and its contents are for informational and educational purposes only and should not be used as the sole basis for any investment decision. Waddell & Associates does not provide personalized investment advice through this communication. The information contained herein is based on publicly available sources believed to be reliable but is not a representation, expressed or implied, as to the accuracy, completeness, or correctness of said information. Past performance does not guarantee future results.
