Alternative investments 101.

Expanding beyond the traditional portfolio

Alternative investments are asset classes that fall outside of stocks, bonds, and cash. These include private equity, hedge funds, venture capital, real estate, infrastructure, commodities, collectibles, and even digital assets like cryptocurrencies.

Why do they matter? Alternatives offer a way to diversify portfolios, reduce reliance on public market performance, and potentially improve long-term risk-adjusted returns. But they also come with trade-offs, including limited liquidity, higher fees, and less transparency.

As client demand for alternatives grows, especially among high-net-worth and institutional investors, advisors who can confidently explain, evaluate, and implement alternative strategies will provide greater value and differentiation.

The case for diversification, alpha, and income

Allocating to alternatives can help address several portfolio challenges:

• Diversification: Many alternatives exhibit low correlation with stocks and bonds, helping to smooth portfolio volatility.
• Potential for alpha: Skilled managers in private equity, hedge funds, or venture capital may identify unique opportunities not available in public markets.
• Income generation: Strategies like private credit, real estate, or infrastructure can generate consistent cash flow.
• Inflation protection: Real assets, including real estate and commodities, may help protect purchasing power in inflationary environments.

Allocation decisions should be aligned with the client’s objectives, risk tolerance, and liquidity needs. While alternatives are not a cure-all, they can serve as powerful tools within a broader strategic framework.

It’s about more than just performance numbers

Evaluating alternative investments requires a deeper level of scrutiny. Beyond reviewing returns, due diligence should include:

• Assessing the fund manager’s experience, investment process, and alignment with client goals.
• Understanding the operational structure including how the fund is administered, who the service providers are, and what compliance practices are in place.
• Clarifying all fees (including performance incentives and potential hidden costs).
• Knowing the redemption terms—are there lockups, gates, or limited windows for liquidity?
• Looking at how the manager’s interests align with yours and your clients'—for example, how much of their own capital they’ve invested.

Using third-party research or consultants can also help bring structure and accountability to the process.

Understanding accredited investors and qualified purchasers

Not all investors are eligible to participate in every alternative investment. Two common classifications are:

• Accredited investors: Typically individuals with over $200,000 in annual income ($300,000 for couples) or a net worth over $1 million (excluding a primary residence).
• Qualified purchasers: Investors or entities with more than $5 million in investments.

As an advisor, it’s important to confirm eligibility before making a recommendation and ensure clients understand the associated risks, especially around liquidity and time commitment.

Knowing the key players helps you navigate the space

Alternative investments often involve more moving parts, and often more people, than traditional portfolios. Knowing who’s who can help you better assess offerings, streamline operations, and understand the roles each participant plays.

• Fund managers/sponsors: These are the firms (or teams) that source, evaluate, and manage the actual investments. They might specialize in private equity, real estate, private credit, or other strategies.
• Platforms: These technology and service providers help advisors access alternative investments and automate things like subscriptions, reporting, and operational workflows.
• Custodians: Institutions that custody private assets, manage transaction documentation, and follow applicable regulatory guidelines.
• Consultants and due-diligence providers: These are independent experts or firms that vet managers, perform in-depth due diligence, and often maintain an “approved list” or recommendation set.
• Other service providers: Think legal counsel, fund administrators, auditors, tax specialists, and compliance consultants. These firms help ensure a fund is running smoothly, ethically, and in line with regulatory expectations.

Understanding how these participants interact—and where they add value—can help you make better-informed decisions for your clients and build more efficient back-office processes. 

Learn more about how SEI addresses the entire alternatives ecosystem here.

10 key points to share with clients

Educated clients are confident clients. Here are 10 simple, important facts worth sharing:

1. Alternatives aren’t traded on public stock exchanges.
2. They often require long-term commitments.
3. Liquidity is usually limited.
4. They can be less transparent than traditional investments.
5. Fees are often higher and more complex.
6. Most are available only to accredited or qualified investors.
7. They can add diversification to a portfolio.
8. Some may help protect against inflation.
9. Manager selection is critical as returns can vary widely.
10. Due diligence is essential before investing.

Investing in companies to drive growth and value.

Private equity funds invest in privately held companies, often acquiring controlling stakes to improve operations and drive long-term value. These funds typically focus on strategies like leveraged buyouts (LBOs), growth equity, or distressed investing.

• Liquidity: Private equity funds typically require long-term capital commitments, often ranging from seven to ten years, with limited or no opportunities for early redemption.
• Risk/reward: While these funds can generate considerable long-term returns, outcomes vary significantly depending on the manager’s investment decisions, operational improvements, and broader market conditions. Investors should be prepared for the possibility that not all portfolio companies will perform as expected.
• Potential best fit: These funds are generally suited to investors with a substantial investment horizon who can tolerate periods of illiquidity and are comfortable with the variability inherent in privately held business investments.

Backing the next generation of innovation.

Venture capital funds invest in early-stage companies, often in technology, biotech, or other high-growth industries. While many investments may fail, the goal is to hit a few big winners that drive strong overall returns.

• Liquidity: Venture capital investments are among the least liquid alternative assets. Capital is returned only when portfolio companies are sold, taken public, or otherwise exited—typically after many years.
• Risk/reward: The potential for significant returns exists, but the likelihood of individual company failure is high. Returns are often driven by a small number of successful investments, while many others may result in little or no recovery.
• Potential best fit: May be appropriate for investors who accept a high degree of uncertainty, are willing to allocate capital for extended periods, and have a strong interest in emerging technologies or business models.

Pursuing flexible strategies across markets.

Hedge funds are privately managed investment vehicles that employ a range of strategies intended to generate returns across various market environments. These strategies may include long and short positions in equities, fixed income instruments, currencies, or derivatives, as well as event-driven or macroeconomic approaches.

• Liquidity: Liquidity terms vary considerably by strategy, though many hedge funds offer monthly or quarterly redemption with advance notice and restrictions.
• Risk/reward: Hedge funds employ a wide array of strategies. Performance can be compelling, particularly in inefficient markets or during periods of dislocation, but outcomes often hinge on manager skill and discipline.
• Potential best fit: Most suitable for investors who seek access to a broader set of return drivers, are comfortable with active strategies, and are able to evaluate complex investment methodologies.

Providing capital where banks often can’t.

Private credit funds provide loans directly to businesses, real estate developers, or other borrowers. These loans may include senior secured debt or mezzanine financing and often offer attractive yields.

• Liquidity: These funds typically allow only limited redemption opportunities, and investments are usually held until maturity or repayment.
• Risk/reward: Private credit can offer stable income streams and higher yields compared to public fixed income markets. However, credit risk, especially in less transparent or lightly regulated borrowers, remains a central concern.
• Potential best fit: Investors who prioritize income, can accommodate reduced liquidity, and are prepared to analyze or accept the creditworthiness of non-traditional borrowers.

Investing in tangible assets with income and growth potential.

Real estate funds buy and manage commercial, residential, industrial, or mixed-use properties. Strategies range from low-risk, income-oriented approaches to higher-risk redevelopment plays.

• Liquidity: Liquidity depends significantly on the structure. Publicly traded real estate investment trusts (REITs) allow frequent trading, whereas private real estate funds typically impose multi-year lockups.
• Risk/reward: Real estate investments may provide both income and capital appreciation, though they are sensitive to interest rate movements, tenant performance, and regional economic conditions.
• Potential best fit: Individuals seeking exposure to tangible assets, income potential through rental yields, and possible inflation mitigation within a diversified portfolio.

Read more about real estate funds here.

Owning the backbone of the economy.

Infrastructure funds invest in large-scale physical systems like highways, airports, energy grids, and telecom networks that are essential to daily life. These assets often generate steady, inflation-linked income under long-term contracts.

• Liquidity: These funds generally require extended holding periods, as the underlying assets are long-lived and difficult to liquidate.
• Risk/reward: Returns are typically stable and derived from essential services. Risks may include regulatory changes, construction delays, and political factors, depending on the jurisdiction and asset type.
• Potential best fit: Investors who value consistent cash flow and are willing to commit capital over the long term in exchange for lower volatility and moderate growth.

Gaining diversified exposure through a single investment.

A fund of funds invests in a collection of alternative funds, giving investors access to multiple managers, strategies, or asset classes within one vehicle. While convenient, this structure adds a second layer of fees.

• Liquidity: Liquidity is contingent on the underlying holdings and is usually more constrained than that of single-manager funds. Redemption timelines are often prolonged by several months.
• Risk/reward: The diversification offered by investing in multiple managers can reduce individual fund risk, but performance is diluted by an additional layer of fees and reliance on the selection process of the fund manager.
• Potential best fit: Those new to alternative investments or investors seeking a managed allocation across strategies who are willing to accept potentially lower net returns in exchange for simplified access and diversification.

Blending accessibility with alternative exposure.

These semi-liquid funds are regulated under the Investment Company Act of 1940 and are designed to provide periodic liquidity. They’ve gained popularity with advisors looking for a balance between access and sophistication.

• Liquidity: These registered fund structures offer limited liquidity, typically allowing redemptions on a quarterly basis, subject to fund limits.
• Risk/reward: These vehicles provide access to alternative investments within a more regulated framework. While transparency and minimums are improved, returns remain dependent on the composition and performance of the underlying assets.
• Potential best fit: Investors who desire partial access to private markets and prefer a structure that includes regulatory oversight yet still understand the liquidity and return characteristics of the asset class.