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What are alternative investments?
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Private Equity is an investment in a private company (as opposed to a public one listed on the stock market). PE funds typically buy a big chunk of an underperforming private company with the goal of turning it around and selling it for a profit. This is risky, since PE investors don’t always succeed at revamping companies. But as the chart shows, the risk can pay off: from 2011 to mid-2024, private equity returned about 14.3% a year, outperforming stocks globally by 4.5%.
There’s a whole universe of investable assets outside of traditional stocks and bonds. Somewhat uncreatively called “alternative assets,” they use creative means to offer increased diversification and potentially higher returns. They do carry more risk, but if you are able to handle it, alternatives can be a great diversifier for your portfolio.
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Annualized total returns between January 2011 and June 2024 shown. Private Credit and public-assets historical returns via Bloomberg. Private Equity, Venture Capital, Private Real Estate and Private Infrastructure via Preqin. Global stocks via MSCI World Equity Index. All information and commentary provided is for illustration purposes only and is not investment advice or recommendations. The past performance of any security or investment strategy is not an indicator of future performance, and past performance may not be repeated. All investments involve risk.
Private Real Estate
Global Stocks
Venture Capital
Private Credit
Private Equity
Venture Capital, like private equity, involves investing in private companies. But, unlike PE, venture capital focuses on startups, giving them cash to grow — and earning money if they do. Venture funds are also risky, since they often bet on companies that are developing unproven tech. But over the past 14 years venture funds returned almost 11.4% a year, outperforming global stocks by 1.6%.
Private Credit funds lend money directly to companies in exchange for interest. The loans use a variable rate that includes a premium over the cash rate, making private credit a nice diversifier to both stocks and fixed-rate bonds. Historically, private credit has managed risk very effectively, with only 1% in realized losses from defaults, which have been more than offset by the high interest payments that are collected. Since 2011, private credit has offered returns in the ballpark of stocks, at nearly 10% a year.
Private Real Estate invests in commercial, residential, and industrial properties. Returns come from two sources: rent payments and any increase in value that comes from improving the properties. Private real estate tends to offer high income, and returns have historically been around 9% — competitive with the global stock market. With certain kinds of properties, you can also get inflation protection and diversification.
If you started with an investment of $5,000 in 2011and made $300 monthly contributions, here's what your returns would have been as of June 2024 in various alternative investments and the global stock market.
How alternative investments compare to stocks
Infrastructure is investment in the assets that are necessary for the functioning of society, including things like toll roads and airports, fiber optic cable and data centers, and cold storage supply chains. Investors like infrastructure because it can provide both inflation and downside protection while offering attractive returns: 10.5% since 2011, which is about the same as global stocks over that period.
Infrastructure
Cash
