Alternative Investments: Why Institutional Investors Are Attracted to This Asset Class and How Firms Should Respond
Competition in the commercial real estate industry is becoming more intense than ever before – the result of factors such as evolving talent models, shifting investor and tenant expectations, the rising influence of new technologies, and increasing amounts of data available. Additionally, with the majority of investment dollars being funneled into the five traditional commercial real estate asset classes (multifamily, retail, office, industrial, and hotel) and prices rising due to competition, big returns are increasingly harder to come by.
As these factors continue to dictate the intensity of competition within the industry, many investors are in pursuit of alternative investment opportunities that will enable them to not only escape these pressures but to also strategically diversify their portfolios. Today, the alternative investment industry worldwide represents $10 trillion in assets under management (AUM) and is forecast to grow to $14 trillion by 2023. With such rapid growth and so many potential advantages to alternative investments, it is unsurprising that investors are drawn to this sector with increasing frequency.
Read ahead to learn more about alternative investments, why investors are attracted to them, and potential impacts for modern-day firms.
What are alternative investments?
Alternative investments are financial assets that are not considered one of the conventional investment categories (stocks, bonds, cash, and so on), and instead include assets such as hedge funds, private credit, private equity, and real assets that offer investors access to a broad set of investment opportunities across markets, geographies, and industries. Further, these investments provide unique risk and return properties that are not found easily in traditional stock or bond investments.
Why are investors seeking exposure to these investments?
Given the diverse nature of alternative investments, there are many reasons why investors are increasingly seeking exposure to the, such as an investor’s specialized understanding of or interest in a particular sector or the fact that there tends to be less regulations on alternative investments. Arguably, however, the top reasons that this asset class has seen such a significant growth in interest are that they create opportunities for broader portfolio diversification and thus reduce risk, and also that they often generate higher returns than an exclusively traditional portfolio.
Broader Portfolio Diversification
Alternative investments are gaining popularity amongst investors looking to diversify their portfolios. While minimizing risk by protecting the portfolio from being overly exposed to one particular asset, these investments also contribute to the maximization of returns. As the alternatives market continues to expand, more and more risk-averse investors are choosing to allocate a portion of their wealth to alternative assets with the goal of diversifying their portfolios while minimizing risk and maximizing returns.
Reduced Risk
Alternative investments tend to behave independently of traditional stock and bond investments, meaning that their performance is less likely to correlate with that of the broader stock, bond, and cash markets. By adding asset classes with lower correlations to each other, a portfolio becomes more diversified, thus reducing its overall risk. In the case of commonly used real estate and commodities, alternative investments can serve as inflation hedges in addition to providing more diversification.
How does investor’s attraction to alternative assets impact forward-thinking firms?
The alternative investment market demands timely and informed decisions and flawless execution. As more and more investors become interested in alternative investments, they will begin to seek firms who are leveraging platforms suited to help them manage their investments. This type of platform enables firms to provide investors with alternative investment data that can then be used to make data-driven decisions. Particularly, these data and insights will be critical as new investors enter the alternative investment market. Forward-thinking firms will want to ensure that they are prepared for this continuous growth and attraction by adopting technology that can support their investors needs and demands.
Ultimately, alternative investments can offer investors a much-needed source of portfolio diversification, reduced risk, and higher returns in comparison to that of traditional investments. According to Preqin, interest in this space is rapidly growing with an expectation to grow 59% by 2023, reaching $14 trillion in assets. As the sector itself is continuously evolving, investors seeking new opportunities in the investment marketplace starting to migrate towards this asset class.
You may also be interested in Investing Outside the Box: Alternative CRE Investment Opportunities.
