How to Evaluate Whether Alternative Investments Fit With Your Goals

Increasingly over the years, investors have asked me about investments outside of the traditional publicly traded portfolios of stocks and bonds, a category broadly known as alternative investments. Hedge funds, venture capital, cryptocurrency, private markets, structured investments, pooled real estate investments, and more used to be known as only available to ultra-high net worth individuals and institutions.

Now, more investors have access to this wide range of investment vehicles. With increased access, the question has shifted from “Can I?” to “Should I?” This is how to evaluate whether alternatives fit with your financial goals.

Focus on Financial Goals First

Before you select any investment for yourself, you should have a clear vision of your financial goals. Examples of financial goals include:

• Increasing current income to reduce need for work.
• Retirement on a specific income by a certain age.
• Reducing risk exposure in a concentrated position.
• Saving money for a major purchase by a certain date.

Most of these basic objectives can be achieved using a simple publicly traded portfolio of stocks and bonds. Special considerations for liquidity needs and risk profiles should be given for alternative investments. Alternatives are meant to be an addition to your overall investment strategy, not the entire thing.

The Needs Alternatives Could Address

Most commonly, I see investors using alternatives for a few purposes: enhancing income opportunities, reducing risk, and increasing returns.

Investors Who Are Income-Focused

The fixed income market has been on a wild ride for the last several years, with 2022 being the worst-ever year in fixed income. Income-focused alternatives can be used to smooth out the experience of investors in public markets because these assets are held in private markets, where valuations tend to change less frequently.

From Q1 of 2016 to Q1 of 2026, private credit manager returns ranged from 4.8-12.2%, while bond managers ranged from .1-2%. Price swings can be more limited when it’s impossible for investors to all rush and liquidate at the same time.

Investors Seeking to Reduce Their Risk

Anything new an investor adds to their portfolio with a correlation of less than one reduces portfolio risk and increases diversification. Hedge funds in particular are often designed to perform exceptionally well when specific asset classes are trending downward.

Investors can also use alternatives like pooled options strategies to protect against losses in concentrated securities as well.

Investors with Long Time Horizons

If you won’t be needing your principal investment back for a long time, you can potentially benefit from enhanced returns available from specific alternative investments. The top performers in venture capital, private equity, private credit, and hedge funds have all had better enhanced performance than the public equity and fixed income markets in the last 10 years.

When Alternatives May Not Be Appropriate

Even though alternatives are more widely available than ever, they just are not going to make sense for certain investors. I have a client who has limited liquid nonretirement assets but placed most of his liquid money in a non-public real estate investment trust. This has presented some problems for him over the years, including the fact that when his objectives changed years later, he was not able to liquidate his share at its full value.

Alternatives are not appropriate when you have or may have liquidity needs during the life of the investment, which can vary widely. They’re also not appropriate when you don’t have sufficient exposure to other investments to achieve diversification. This was a big reason why alternatives were once only available to high-net-worth investors.

Alternatives also tend to be complicated, so while you should always review the prospectus in depth, if there is any aspect you are not understanding and your advisor cannot adequately explain to you, you should not be investing in alternatives.

Alternatives Are Not the End-All Be-All

Ultimately, most investors will be able to hit their financial goals by simply investing in a publicly traded portfolio of stocks and bonds in line with their risk tolerance. For retail investors, the potential benefits of alternative investments do not outweigh the risks and lack of liquidity.

Alternative investments can play a valuable role for some investors, but access alone is not a reason to invest. The right strategy starts with your goals, liquidity needs, risk tolerance, and overall financial picture. When used thoughtfully and in moderation, alternatives can complement a portfolio, but they should support your plan, not define it.

By Cicely Jones, Contributor