Alternative Asset Management: 4 Strategies and Examples

Traditional stocks and bonds have long been the foundation of most investment portfolios, but they’re no longer the only game in town. From private equity and hedge funds to commercial real estate and private lending, alternative investments have grown into a multi-trillion-dollar market attracting institutions and individual investors alike. These assets can offer new opportunities for diversification and returns, but they also come with unique risks and complexities.

A financial advisor can help you create the right asset management strategy that helps with your unique situation and goals.

What Is Alternative Asset Management?

Alternative asset management is the practice of investing in assets outside of traditional stocks, bonds and cash. It typically involves managing portfolios that include investments such as private equity, hedge funds, real estate, private credit, commodities, infrastructure and other non-traditional asset classes. The goal is often to enhance diversification, generate higher returns or reduce exposure to the performance of public markets.

Alternative asset managers use specialized strategies that can differ significantly from those of conventional investment management. For example, a private equity manager may acquire and improve privately held companies before selling them for a profit. Or, a hedge fund manager may use leverage, derivatives or short-selling to pursue returns in different market environments. These approaches often require specialized expertise, longer investment horizons and more active oversight.

Institutional investors, such as pension funds, endowments and insurance companies, have long used alternative investments as part of their portfolios. In recent years, however, alternative assets have become more accessible to individual investors through interval funds, private market funds, real estate investment trusts (REITs) and other investment vehicles.

While alternative asset management can offer potential benefits, it also comes with unique risks. Many alternative investments have limited liquidity, higher fees and less transparency than publicly traded securities. As a result, investors typically evaluate alternative assets as a complement to a diversified portfolio rather than a replacement for traditional investments.

1. Private Equity

Private equity involves investing directly in privately held companies, or acquiring public companies and taking them private. Alternative asset managers raise capital from investors and use it to buy businesses they believe can be improved, expanded or repositioned to increase their value over time. The investment horizon is typically long-term, often lasting several years before the manager exits through a sale, merger or initial public offering (IPO).

One common private equity strategy is the leveraged buyout (LBO). With this, a manager acquires a company using a combination of investor capital and borrowed funds. The manager then works to improve operations, increase profitability or streamline costs before selling the business. Another approach is growth equity, which focuses on investing in established companies that need capital to fund expansion.

2. Hedge Funds

Hedge funds are pooled investment vehicles that use a wide range of strategies to generate returns. Unlike traditional mutual funds, hedge funds often have greater flexibility to invest across asset classes and may use techniques like leverage, derivatives and short-selling. Their objective is typically to produce positive returns regardless of whether broader markets are rising or falling.

Hedge fund managers employ different approaches depending on their investment philosophy. Some focus on long-short equity strategies. They’ll buy stocks they expect to rise while shorting stocks they believe will decline. Others may pursue event-driven opportunities, global macro investing or arbitrage strategies designed to profit from pricing inefficiencies in financial markets.

3. Real Assets

Real assets are physical assets that derive value from their tangible characteristics rather than financial contracts. This category commonly includes real estate, infrastructure, farmland, timberland, energy projects and certain commodities. Alternative asset managers often invest in real assets to generate income, provide diversification and potentially hedge against inflation.

One of the most common real asset strategies is commercial real estate investing. Managers may acquire office buildings, apartment complexes, industrial warehouses or retail properties with the goal of generating rental income and benefiting from long-term appreciation. Infrastructure investments, such as toll roads, airports or renewable energy facilities, can also provide relatively stable cash flows tied to long-term contracts or essential public services.

4. Private Credit

Private credit refers to loans made directly to businesses or other borrowers outside of traditional public debt markets. Instead of purchasing publicly traded bonds, alternative asset managers provide financing to companies that may not want to, or be able to, raise capital through banks or public markets. In return, investors earn income through interest payments and loan-related fees.

Private credit strategies can take several forms, including direct lending, mezzanine financing and distressed debt investing. Direct lending is one of the fastest-growing segments of the alternative investment market. With this, managers provide loans to middle-market companies seeking capital for expansion, acquisitions or refinancing. These loans are often customized to meet a borrower’s specific needs.

Bottom Line

Alternative asset management focuses on investments outside traditional stocks and bonds, including private equity, hedge funds, real assets and private credit. These strategies can offer diversification, unique sources of return and potential protection against market volatility, which is why they have become increasingly popular among both institutional and individual investors. However, alternative investments often involve higher fees, lower liquidity and greater complexity than traditional assets. Before incorporating alternative investments into a portfolio, investors should carefully evaluate the risks, time horizon and role these assets may play within their broader financial plan.

Tips for Investing

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