Alternative assets may not meet expectations

Alternative assets, such as private equity and hedge funds, are all the rage in the investment world. BlackRock (NYSE: BLK), the world’s biggest money manger with $11.6 trillion of assets under management, is a case in point.

BlackRock CEO Larry Fink lauds the potential of alternative assets, while lamenting their lack of accessibility for average investors. 

Alternative investments have been the province of institutional investors for years. But now BlackRock and other fund management firms are trying to bring individual investors to the table with mutual funds and exchange-traded funds (ETFs). Assets of these funds totaled $104 billion as of Dec. 31, according to Morningstar.

“Assets that will define the future—data centers, ports, power grids, the world’s fastest-growing private companies—aren’t available to most investors,” Fink said in his annual letter to shareholders. “They’re in private markets, locked behind high walls, with gates that open only for the wealthiest or largest market participants.”

Asset allocation: from 60/40 to 50/30/20

The rule of thumb for years has called for a portfolio of 60% stocks and 40% bonds for individual investors. But Fink says the future portfolio might be closer to 50% stocks, 30% bonds and 20% private assets such as real estate, infrastructure, and private credit.

But it’s no slam dunk that alternative-investment funds will be successful for individuals. Research from Morningstar shows that returns for all six of its categories of alternative asset funds lagged the stock market and a 60% stocks/40% bonds portfolio over the last 15 years.

The Morningstar US stock Market index posted a 12.9% annualized return during that period, while a 60/40 portfolio showed an 8.9% return. However, the six alternative categories scored returns of just 1.5% to 4.2%.

Risk-adjusted returns not ‘compelling’

To be sure, risk for the alternative funds has been lower than stocks and a 60/40 portfolio too, “but generally not low enough to generate compelling risk-adjusted returns,” wrote Morningstar portfolio strategist Amy Arnott.

Morningstar doesn’t list any alternative fund above its third highest rating out of five, “illustrating the lack of high-conviction investment options in the space,” she said. In addition, alternative funds have high expenses, making them far pricier than more mainstream assets.

Some experts, such as Harvard economist Larry Summers, argue that investing in alternative assets is just a leveraged bet on stocks. That can mean volatile moves. 

As a proxy for the industry, have a look at Blackstone (NYSE: BX), the largest alternative asset manager. Its stock has returned negative 17% this year, compared to a positive 35% return last year, an 83% positive return in 2023 and a 40% negative return in 2022. Those are pretty big swings.

So while it is possible to make money in alternative investments, don’t count on it.