The S&P 500 tumbled 20% during the first six months of 2022, its worst first-half decline in half a century. Meanwhile, the bond market experienced its worst decline on record. A typical portfolio of 60% stocks and 40% bonds produced its worst return since the Great Depression. 

The lackluster returns and nauseating volatility are leading more investors to seek alternatives to the public stock and bond markets. They're increasingly allocating more of their portfolio to alternative investments like private equity, hedge funds, real estate, and infrastructure. Prequin, a leading data provider to the alternative asset community, sees investments in alternatives rising to more than $17 trillion by 2025, a roughly 10% annual growth rate from 2020's level. That should drive continued growth for leading alternative asset managers Blackstone (BX -0.34%)Brookfield Asset Management (BN -0.80%), and KKR (KKR -0.18%)

Cashing in on alternatives

Blackstone is the king of the alternative asset management sector. The company ended the second quarter with an industry-leading $940.8 billion of assets under management (AUM). 

Investors are pouring capital into Blackstone's funds. Inflows were a jaw-dropping $88.3 billion in the second quarter alone. That was its second-best quarter ever and equal to its total AUM at its initial public offering in 2007. 

Blackstone's rapidly rising AUM earns it two revenue streams. A large portion is fee-earning AUM ($683.8 billion at the end of the second quarter), which supplies it with recurring management fees. Blackstone recorded $1 billion of fee-related earnings in the second quarter, up 45% year over year. In addition, Blackstone earns performance revenues as its funds deliver on their return objectives. The company realized a net $1.1 billion of performance earnings in the second quarter, boosting its total distributable earnings to over $2 billion.

The company distributes the bulk of this income to shareholders via a dividend that yields over 5%. Blackstone also repurchases shares and invests some capital into its funds to further enhance shareholder value. As more investor capital flows into Blackstone, the company's earnings streams will rise, enabling it to keep growing shareholder value.

Highlighting the value of asset management

Brookfield is another leading global alternative asset manager. The company had over $750 billion of AUM at the end of the second quarter. 

The company currently has two businesses: Asset management and direct investment. Brookfield has historically retained a large percentage of its asset management income for reinvestment in its funds and other investments. However, the company plans to separate these two businesses and spin-off a quarter of its asset management business to shareholders. That will enable them to benefit more directly from the value created by its asset management business. 

Brookfield expects its asset management business to grow its fee-bearing capital to $1 trillion within the next five years. That positions the company to double its fee-related earnings to over $4 billion and realize significant carried interest (its share of the profits from managed investments). It expects the spun-out asset management business to pay out 90% of that steadily growing income stream to investors via a large and growing dividend. Meanwhile, investors will retain the upside of its direct investment strategy, positioning them for significant value creation as both businesses grow in the future.

Continuing to grow

KKR is another leading global alternative asset manager poised to capitalize on the rise in alternatives. The company ended the second quarter with $491 billion of AUM, up 14% year over year. Of that amount, $384 billion was fee-paying AUM, a 20% year-over-year increase. 

The company has been working to grow and diversify its business. It has increased its real estate AUM by 50% over the last 12 months to $114 billion by launching new funds and other investment products.

KKR's growth strategy has been paying off. Fee-related earnings are up 40% over the past year to $2.2 billion. Meanwhile, after-tax distributable earnings have soared 60% to $4.1 billion. KKR pays a portion of that income out via dividends. It also retains earnings to reinvest in its funds, positioning shareholders to capitalize on the income and upside produced by those investments. KKR expects to continue growing briskly as it launches new funds and other products to capitalize on the growing desire of investors to allocate more capital to alternative investments.

Capitalizing on the rise of alternatives

Investors continue to pour money into alternative investments, with industrywide AUM expected to top $17 trillion by 2025. That will be a huge boon for leading alternative asset managers Blackstone, Brookfield, and KKR. They should continue rapidly growing their AUM, enabling them to generate lucrative and recurring fee income and significant performance-based revenue. That will provide them money to pay dividends and invest in their funds, giving shareholders some exposure to alternatives. These drivers position the companies to create significant value for shareholders in the coming years, which is why investors won't want to miss out on this enormous opportunity.