Diversification, Technology, and Youth Drive the Trend into 2024

In 2023, while economic uncertainty continued to weigh on traditional asset classes, alternative asset classes continued to explode globally in popularity. The most notable increase in allocation came from Gen Z investors, who joined family offices and institutional investors in the pursuit of reducing volatility, increasing income, and adding uncorrelated asset classes to better suit their risk and reward appetites.

Defining Alternative Investments

Alternative investments are investments that do not belong in traditional asset classes such as cash, stocks, and bonds. They typically span the spectrum of risk, return and liquidity. Furthermore, alternatives share the following principal characteristics:

Until now, regulatory restrictions along with higher minimums and higher fees compared to traditional investments have meant that alternative investments were typically the mainstay of institutional investors and ultra-high net worth individuals.

Breaking down Alternative Investment Classes

Prime examples of alternatives include:

Global Alternatives AUM to hit $23.21 Trillion by 2026 

According to research firm Preqin,  Global Alternatives AUM will hit $23.21 trillion by 2026, up from an estimated $13.32 trillion at the end of 2021 (11.7% CAGR).

Private equity, coupled with venture capital, “should be by far the largest of the alternative asset classes” in 2026, said Dave Lowery, a senior vice president and head of research insights for Preqin. Contributions from HNWIs, wealth managers and retail investors already account for about 5%, or $750 billion, of the industry’s global AUM, according to Preqin estimates. This will grow even more as regulatory changes and advancements in investor education and technology lower barriers to entry.

Why Understanding Alternative Asset Investing Trends is Essential

Understanding the trends of alternative asset investing is critical for investors who seek superior returns, diversification into uncorrelated assets, and a hedge against market risks. Trends in alternative investing help investors identify emerging investment opportunities on the cusp of significant innovation and which have the potential for strong returns. Investors who understand the alternative investing landscape can also increase their ability to obtain assets that are uncorrelated to volatile public markets, which tend to move significantly based on sentiment, and that hedge against specific macroeconomic and geopolitical headwinds.

Fintech Shines as Old Working Methods Stymie Fund Administrators

Alternative investment administrators and fund managers are increasingly turning to financial technology solutions to relieve heightened business management, regulatory compliance, and risk management pressures.

Selected Trends

• The quantity of data that alternative investment managers and administrators must manage, review and leverage are increasing at a rapid rate, and this creates data silos.
• Many alternative investment management companies are still running their businesses using legacy spreadsheets and paper-based processes.
• The pressures on alternative investment professionals are mounting due to limited resources, asset complexity and more.

Selected Solutions to Digitize Workflows 

1. CRM solutions to manage communications across the entire investment life cycle.
2. Investor relations solutions to provide secure access to account and fund information.
3. Portfolio management solutions to centralize all fund and holdings data on a single platform.
4. Accounting solutions to manage all types of pooled investments both onshore and offshore.

Millennials and Gen Z are Piling their Capital into Alternative Assets 

The generational divide in investment behaviors, attitudes, and motivations is more than a fascinating observation – it is a harbinger of change. Compared to baby boomer and Gen X investors, these younger investors are not only interested in alternative assets; they are actively increasing their allocations, driven by a desire for diversification, higher returns, and a comfort with digital technology and unconventional asset classes. 

In the May 2023 Franshares.com survey, The State of Alternative Assets For Retail Investors, 72% of millennials and 85% of Gen Z survey respondents said they dedicated between 10% and 20% of their portfolios to alternatives in 2023.

31% of millennials and 47% of Gen Z respondents said they use social media like TikTok and Instagram to research investments, and a similar percentage use YouTube. 

It is not just Retail Investors: Advisors are also Focusing on Alternative Assets 

As alternative assets continue to grow in importance and demand, financial advisors are not just spectators; they are active participants. According to a recent report from Cerulli Associates, advisors are increasingly leaning toward alternative assets, echoing the trends observed among retail investors. 

According to Cerulli Associates study, financial advisors made a bigger push into alts in 2023 allocating 14.5% of clients’ portfolios to alternatives. Those allocations are expected to rise to 17.5% in 2024. 

The motivations behind this trend are multifaceted. For instance, a significant 69% of advisors aim to reduce their clients’ exposure to public markets, while 66% of advisors are investing in alternatives to reduce volatility and reduce downside risk. Income generation for their clients is another compelling factor for advisors, with 59% looking to alternative assets as potential passive income sources. Portfolio diversification and growth or enhanced return opportunities are also key drivers, cited by 52% and 42% of advisors, respectively. 

What is most interesting about the data from Cerulli, is just how similarly financial advisors are thinking about alternative assets as retail investors, particularly Gen Z investors, as reported by Franshares.com.

Adapting to the Technological Shift

Fund managers that remain anchored to existing business methods and impose cumbersome, bureaucratic processes on prospective investors will struggle to grow or keep their assets. Conversely, alternative investment managers that capitalize on the use of Fintech can position their funds for significant global growth amongst a diverse array of investors.

Global Alternatives AUM will hit $23.21 trillion by 2026, up from an estimated $13.32 trillion at the end of 2021 (11.7% CAGR)

Bottom Line

2023 was enlightening, to say the least. The asset management industry saw seismic change in asset allocation. Most significantly, a new generation of investors and advisors are driving this change and the transformation to Fintech for the alternative investment world is well underway. There is limitless upside for asset administrators that proactively embrace Fintech. 

The landscape of asset management is continuously evolving. Trends like ESG investing, AI and Machine Learning, and Blockchain and Cryptocurrency rang the changes in 2023. Importantly, the effectiveness of these alternative investments relies on informed reporting, stringent ethical and regulatory considerations, and strategic diversification of assets. 

As alternative assets continue to become mainstream, financial advisors are demonstrating improved understanding of their role in portfolio diversification. Advisors that are already navigating this asset class are in line with the thinking of younger investors in this complex market.

Fund administrators are increasingly becoming Fintech companies as they add data analytics tools and automated product offerings to meet the needs of alternative fund managers and their target investors.