Formerly a preserve of institutional investors and high-net-worth individuals, alternative investments are becoming part of a broader investment strategy accessible to retail and individual investors. Alternative investments cover investments outside the traditional area of stocks, bonds, or cash. Several factors and developments are shaping the alternative investment industry.

1. Trends Shaping the Alternative Investments Industry
Veronica Lopez-Lopez

2. Introduction
Formerly a preserve of institutional investors and high-net-worth individuals,
alternative investments are becoming part of a broader investment strategy
accessible to retail and individual investors. Alternative investments cover
investments outside the traditional area of stocks, bonds, or cash. Several factors and
developments are shaping the alternative investment industry.

3. It was difficult, if not impossible, for individual investors to access most alternative
investment assets. This was due to a lack of market transparency, high investment
thresholds, and the high degree of specialized knowledge needed to understand and
leverage the value of such investment opportunities. However, the emergence of
technology-enabled platforms has given many individual investors access to
alternative investment assets that were previously only accessible to institutional
investors and a select few individuals.

4. The alternative investments industry is an ever-evolving one with opportunities
constantly emerging. In the years ahead, the sector is expected to change as new
international investment opportunities emerge, including more types of alternatives
to consider investing in. Sovereign wealth funds, pensions, and institutions are
increasing their holdings in different kinds of alternative investments. In addition,
many investors are now seeking tailored investment solutions and customized
portfolios.

5. The persisting environment of low-interest rates has slowed down the uptake of
many traditional assets that were once considered safe havens. This means that
investors are no longer assured that the traditional 60/40 portfolio will protect
against capital loss or provide healthy returns. Many investors are turning to
alternative investments and mixing asset classes that promise more market stability,
such as real estate, in response to the changing environment.

6. Compared with traditional investments, the alternative asset class has many
advantages, including lower volatility, lack of correlation to equities, and strong
performance through different market cycles. At the same time, they offer the
potential for much better returns even compared to highly-rated sovereign bonds. In
addition, private markets such as equity and private debt may at times offer
attractive returns beyond what public markets provide.

7. Given today’s inflationary pressures and low or even negative real yields, investors
place great importance on investment assets capable of generating positive real
yields and cash flows over time. Because they are highly liquid, the value of
traditional assets constantly fluctuates. Alternative assets with implicit or explicit
inflationary protection mechanisms, including certain types of real assets, are
deemed well-positioned to deliver risk-adjusted and profitable returns.

8. Previously, the opaqueness around the alternative investment industry was viewed
by many insiders as an essential factor that contributed to safeguarding proprietary
asset allocation and investment strategies. However, this opacity and exclusivity
tended to also protect portfolio managers from questions in cases where they might
have taken excessive risks by investing in illiquid securities. These levels of risks
that investors were exposed to became apparent during the 2008 global financial
crisis. Sadly, it was too late for many investors to take action that could have
protected their investment.

9. In efforts to avoid a repeat of the 2008 experiences, industry regulators have passed
several laws that are designed to maximize transparency, protect investors, and
ensure capital markets liquidity. In the US, for example, under the Dodd-Frank law
signed in 2010, alternative investment managers holding over $150m in assets under
management (AUM) must register with the US Securities Exchange Commission
(SEC) and report on aspects such as levels of AUM, credit risk exposure and trading
positions.