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Alternative Investments of the Ultra-Wealthy in 2022

Alternative investments are going mainstream.

By Lyle Daly – Updated Sep 26, 2022 at 4:43PM

It's no secret that the ultra-rich have access to alternative investments that are often unavailable to the average investor, like expensive wine, fine art, and equity in private companies.

What may come as a surprise is just how much their portfolios are weighted towards these types of investments. Among ultra-high-net-worth investors (those with a net worth of at least $30 million), alternative investments make up 50% of assets, compared to just 5% for the average investor.

alternative-investments
Image source: Getty Images.

Read on to find out how the ultra-wealthy incorporate alternative investments into their portfolios.

Key findings

  • Ultra-high-net-worth investors had 50% of their assets in alternative investments in 2020.
  • Alternative investment usage is higher among wealthier investors, with 81% of ultra-high-net-worth investors having alternative assets in their portfolio.
  • Private equity is the only alternative investment to outperform the S&P 500.
  • Worldwide, 32% of investors currently hold alternative investments
  • Total alternative investments under management are estimated to reach $17.2 trillion in 2025.

What are alternative investments?

Alternative investments are investments in anything outside of the stock, bond, and currency markets. It's a broad term that encompasses tangible assets, commodities trading, investments in hedge funds, and even digital assets. These types of investments are often chosen as a hedge against inflation and, of course, to maximize returns.

Examples of alternative investments

Since there are so many things that fit the description of an alternative investment, here are some common examples:

  • Private equity
  • Real estate
  • Hedge funds
  • Private credit
  • Rare whisky
  • Art
  • Watches
  • Coins
  • Cars
  • Cryptocurrency

Alternative investment use among investors

For the everyday investor, alternative investments typically make up a small portion of their overall assets. Retail investors have about 5% of their portfolios in alternative investments, according to a survey from the Chartered Alternative Investment Analyst Association.

Among millionaire and multi-millionaire investors, it's a whole different story. A survey from global investing firm KKR found that high-net-worth investors (those with a net worth of at least $1 million) allocated 26% of their assets to alternative investments in 2020.

Ultra-high-net-worth investors (those with a net worth of at least $30 million) had 50% of their assets in alternative investments. Here's how these two groups of wealthy investors distributed their money:

Data source: KKR (2021).
Assets High-net-worth investors Ultra-high-net-worth investors
Listed equities 49% 31%
Fixed income 22% 10%
Alternatives 26% 50%
Cash 2% 9%

Asset allocation for high-net-worth families

High-net-worth families have 31% of their assets in listed equities, which make up the largest portion of their investments, according to KKR's survey.

Private equity is next, with high-net-worth families allocating 27% of their assets towards this type of alternative investment. And like many Americans, they also put part (11%) of their assets towards investing in real estate.

Data source: KKR (2021).
Asset class Allocation among high-net-worth families
Listed equities 31%
Private equity 27%
Real estate 11%
Fixed income 10%
Cash 9%
Hedge funds 6%
Private credit 4%
Other real assets 2%

Usage levels of alternative investments by demographics

Worldwide, 32% of investors currently hold alternative investments, according to the 2021 EY Global Wealth Research Report.

That report also includes usage levels by different demographics, as well as projected usage levels by 2024. As you'll see, usage of alternative investments varies considerably by net worth, age, and location.

Percentage of investors with alternative investments by net worth

EY classified investors into four groups based on their level of wealth. Alternative investment usage rises for each group, and among ultra-high-net-worth investors, 81% have alternative investments.

Data source: EY (2021).
Net worth level Current usage level of alternative investments Estimated usage level by 2024
Mass affluent 14% 32%
High-net-worth 29% 46%
Very-high-net-worth 55% 68%
Ultra-high-net-worth 81% 85%

Percentage of investors with alternative investments by region

Interestingly, North America is the region with the lowest usage of alternative investments. This is most likely due to the strong historical performance of the stock market, as investors don't need to seek out alternatives to get a good return.

Data source: EY (2021).
Region Current usage level of alternative investments Estimated usage level by 2024
Global 32% 48%
North America 18% 27%
Asia-Pacific 37% 61%
Europe 37% 54%
Middle East 55% 71%
Latin America 70% 79%

Percentage of investors with alternative assets by generation

Gen Xers are the most likely to have alternative investments, but that may not last much longer. The percentage of millennials who use alternative investments is expected to explode by 2024.

Data source: EY (2021).
Generation Current usage level of alternative investments Estimated usage level by 2024
Millennial 32% 60%
Generation X 38% 54%
Baby Boomer 26% 34%

Performance data for alternative investments and the S&P 500

Private equity is the only alternative investment to outperform the S&P 500. Several indices track major alternative investment classes, and we can use these to compare their performance over the years with more traditional investment options.

Data source: Author's calculations.
Index Average return, 2021 Average return, 2017 to 2021 Average return, 2012 to 2021
S&P 500 28.7% 19.2% 17.1%
Cambridge Associates U.S. Private Equity Index 41.3% 23.6% 18.5%
Bloomberg Barclays U.S. Aggregate Bond Index -1.5% 3.6% 3.0%
Cliffwater Direct Lending Index 12.8% 8.8% 9.7%
NCREIF Property Index 6.15% 2.4% 2.5%
Barclay Hedge Fund Index 10.2% 7.4% 3.6%

How luxury goods fare as alternative investments

The value of luxury goods has increased by 123% over the last 10 years, as reported by the Knight Frank Luxury Investment Index at the end of 2021.

Certain items perform much better than others. Rare whisky is the standout, with its value increasing by 428% over the past decade. On the other hand, furniture and colored diamonds have recorded far more modest 10-year changes of 19% and 23%.

Despite the potential for appreciation, luxury goods normally don't make up a large portion of wealthy investors' alternative assets. There are several reasons for that:

  • Luxury goods are illiquid. They can be expensive and time-consuming to buy and sell even in small quantities.
  • They're risky and relatively unregulated. For example, counterfeit art is a long-standing problem and sales are not always reported.
  • Historical data for particular items can be lacking.
  • Some luxury goods can require significant costs over time for things like maintenance and upkeep.
Data source: Knight Frank (2021).
Item 12-month change 10-year change
Knight Frank Luxury Investment Index 9% 123%
Rare whisky 9% 428%
Cars 3% 164%
Wine 16% 137%
Watches 16% 108%
Handbags 7% 78%
Art 13% 75%
Coins 9% 64%
Jewelry 2% 57%
Colored diamonds 2% 23%
Furniture 1% 19%

Digital assets as alternative investments

Cryptocurrency has been a fringe investment for years now, and it became considerably more popular in 2020.

It has also helped spur growth in popularity for more blockchain-based assets, including non-fungible tokens (NFTs). Many NFTs are used to buy and sell digital art, bringing alternative art investments to the digital world.

A report by Capgemini found that digital assets, which include the aforementioned cryptocurrencies and NFTs, are highly popular among high-net-worth individuals (those with at least $1 million). According to Capgemini's survey,

  • 71% of high-net-worth individuals have invested in digital assets and
  • 91% of high-net-worth individuals younger than 40 have invested in digital assets.

Alternative investments are poised for growth

Total alternative assets under management are projected to reach $17.2 trillion by 2025, according to Preqin, a firm that provides data and analytics on alternative investments. That's about a 320% increase from the $4.1 trillion in alternative assets under management in 2010.

Data source: Preqin (2020).
Year Alternative assets under management
2010 $4.1 trillion
2011 $4.6 trillion
2012 $5.6 trillion
2013 $6.4 trillion
2014 $6.9 trillion
2015 $7.3 trillion
2016 $7.8 trillion
2017 $8.8 trillion
2018 $9.5 trillion
2019 $10.8 trillion
2020 $10.7 trillion
2021 (projected) $11.8 trillion
2022 (projected) $13.0 trillion
2023 (projected) $14.2 trillion
2024 (projected) $15.6 trillion
2025 (projected) $17.2 trillion

Institutional investors plan to increase their alternative investments

The vast majority (81%) of the institutional investors surveyed by Preqin intend to increase their allocation of funds to alternative investments by 2025.

Just 3% intend to decrease their allocation to alternative investments in that timeframe.

Data source: Preqin (2020).
Institutional investors' plans for allocations to alternative investments by 2025 Percentage
Will increase significantly 26%
Will increase 55%
Will stay the same 16%
Will decrease 2%
Will decrease significantly 1%

Institutional investors' plans for allocation to alternative investments by asset

Private equity is the best-performing alternative investment, and it's also where institutional investors plan to invest more, with 79% saying they'll increase their asset allocation by 2025.

Data source: Preqin (2020).
Institutional investors' plans Private equity Private debt Hedge funds Real estate Infrastructure Natural resources
Will increase significantly 23% 16% 8% 10% 15% 6%
Will increase 56% 51% 27% 41% 51% 29%
Will stay the same 17% 25% 34% 33% 24% 38%
Will decrease 3% 6% 19% 13% 6% 19%
Will decrease significantly 1% 2% 13% 2% 3% 8%

Outside experts weigh in

Andy Puckett, PhD, Professor of Finance at Haslam College of Business, University of Tennessee

Andy Puckett, PhD

Professor of Finance at Haslam College of Business, University of Tennessee

Why do you think the ultra-wealthy are more likely to hold alternative investments than middle-class or mass affluent investors?

Alternative asset classes are often marketed as being uncorrelated (or having relatively low correlations) with publicly available investments such as stocks and bonds. There is also a suggestion that some of these alternative investments have high returns relative to their risk. Both claims are more controversial than most in the industry would have you believe. Ultimately, I think the allure of alternative investments for the ultra-wealthy is their exclusivity, not the true expected risk-return profile of the investment.

Should most investors consider more alternative investments, like cryptocurrency, luxury items, or direct lending? Why or why not?

Yes, I think investors should consider and investigate alternative investments. However, "alternative" investments are a very diverse bucket. Invest in what you know, what has intrinsic value, or what can provide expected cash flows in the future. If an investor considers Bitcoin as an "alternative" investment, then my answer would be a resounding NO. The purported benefits of Bitcoin are that it is an alternative currency and store of value, yet Bitcoin does not satisfy the conditions that we typically use to classify either a currency or store of value. I have yet to hear a coherent explanation for why Bitcoin will be valuable in 20 years.

Holdings of alternative investments are projected to increase by over 300% between 2010 and 2025. What do you think is behind this significant increase?

There are huge amounts of liquidity in the economy right now and ALL real asset prices are rising. Inflation figures are already above 5% per annum, and there is little evidence that anything is being done to curtail it. Given that, investors would be well advised to have a significant portion of their investments in real assets.

81% of institutional investors are planning on increasing their alternative investment holdings by 2025. Why do you think this is?

Public equities (at least in the US) are extremely expensive right now from a historical perspective, and fixed income yields are also at historic lows. My guess is that many institutional investors are looking to take some of their holdings from expensive public equities or low-yielding debt and put them in alternative investments.

32% of institutional investors are planning on decreasing their allocations in hedge funds. Does this signal a loss of confidence in the hedge fund model?

Hedge funds charge incredibly high fees for what they provide -- in some cases more than 100 times the fees of an index mutual fund. Yet there is evidence that hedge fund investors do not receive any type of superior return for their investments, and likely experience worse outcomes. I think that institutional managers are just finally understanding the empirical evidence. 

Rare whisky, classic cars, wine, and handbags have increased in value by over 100% in the past 10 years. Does this mean more investors should consider investing in luxury items?

Again, investors should invest in what they know, what has intrinsic value, or what can provide expected cash flows in the future. While collectibles have had a great increase in value in recent years, there is a lot of evidence that these returns are incredibly heterogeneous and nuanced. For example, recent research on collectible coins shows that the returns during the 2008–2015 period of MS (Mint State) coins were approximately 4% per year, yet the returns to similar coins graded G (good) were less than -- 5% per year. The same kind of dispersion can be shown for baseball cards, wine, art, etc. If investors are going to put their hard-earned money in collectibles and luxury items, they need to know the particular market that they are investing in well.

Richard Warr, Professor of Finance at Poole College of Management, NC State University

Richard Warr

Professor of Finance at Poole College of Management, NC State University

Why do you think the ultra-wealthy are more likely to hold alternative investments than middle-class or mass affluent investors?

The ultra wealthy are more likely to hold assets outside of retirement plans which typically have a lot of restrictions. So for many ordinary investors, these asset classes are just not available. For the ultra wealthy, alternative assets can provide higher expected returns, in part because they are much less liquid. But holding illiquid assets really only makes sense for those who have a good proportion of their portfolio already in liquid, traditional assets. High net worth investors can also afford to be more speculative - by definition they already have a lot of wealth, so they can take more risks. 

Should most investors consider more alternative investments, like cryptocurrency, luxury items, or direct lending? Why or why not?

Alternative investments encompass a wide range of products. Real estate and private equity make a lot of sense for higher net worth investors. They tend to be quite illiquid, so should only be held in a portfolio that has a liquid portion - such as traditional assets like bonds and stocks.

My definition of an investment is something that has a fundamental value that we can estimate and that generates some sort of income stream (although that income can be retained in the asset -- such as a stock that doesn't pay dividends). Many alternative assets don't really satisfy this definition, and so in my opinion, many alternative investments aren't really investments. They are just stuff. Whisky, fine wine, art, and baseball cards aren't really investments. They are really more like aspirational items that high net worth investors might like to buy. I wouldn't seriously consider these to be a part of anyone's portfolio, but if someone wants to collect wine or art, then all power to them, but it shouldn't really be considered to be part of an investable asset class.

Cryptocurrency is more of a speculative instrument rather than an asset. Crypto generates no income and is very very hard to establish a fundamental value on, as a result, it's almost impossible to make a judgment as to whether any particular crypto is over or undervalued. With crypto you are just making a bet that it will increase in value, but there are really no fundamentals that can support any particular valuation.

Holdings of alternative investments are projected to increase by over 300% between 2010 and 2025. What do you think is behind this significant increase?

This is largely due to the continued increase in wealth of higher net worth individuals. As more money chases a limited supply of stocks and bonds, investors start looking for additional places to place their money. In addition, alternative investments tend to have much higher fees than traditional assets. They tend to be very profitable for investment companies and advisors and hence are promoted heavily to high net worth clients.

81% of institutional investors are planning on increasing their alternative investment holdings by 2025. Why do you think this is?

Most of them are chasing higher returns. The number of stocks listed in the stock market has been flat, yields in the bond market are very low, so institutions are looking for other places for yield. Alternatives such as private equity and real estate may help in this search.

32% of institutional investors are planning on decreasing their allocations in hedge funds. Does this signal a loss of confidence in the hedge fund model?

Hedge fund returns have really been overhyped for years. Hedge funds are incredibly expensive from a fee point of view and furthermore, buying and selling them is extremely complex. They are basically very expensive investments that in general, don't provide better performance than a diversified portfolio of stocks and bonds. My concern would be that an institution would move from one over-hyped expensive investment to another. 

Rare whisky, classic cars, wine, and handbags have increased in value by over 100% in the past 10 years. Does this mean more investors should consider investing in luxury items?

These aren't investments! They are just expensive stuff that might increase in value. You should buy luxury items because you want to own them and they bring you pleasure. Trying to justify your purchase of a classic car as an investment is basically trying to justify your hobby as something more legitimate!

Dr. Pamela Drake, Professor of Finance at James Madison University

Dr. Pamela Drake

Professor of Finance at James Madison University

Why do you think the ultra-wealthy are more likely to hold alternative investments than middle-class or mass affluent investors?

The ultra-wealthy have a higher tolerance for risk; if they lose all of an investment’s value, they still have other resources. If someone in the middle class took significant risks with alternative investments, losses would impinge upon their standard of living. The willingness to take on more risk increases as wealth increases.

Should most investors consider more alternative investments, like cryptocurrency, luxury items, or direct lending? Why or why not?

Definitely not. Cryptocurrency is the Tulip Mania of our generation, so this should be off the table – no matter what you hear about great "profits." Everyone needs to live within their means. Shooting for the stars is fine if you have a significant financial cushion, but otherwise it is not wise.

Holdings of alternative investments are projected to increase by over 300% between 2010 and 2025. What do you think is behind this significant increase?

Worrisome. The mania will end. And predictions are often wrong.

81% of institutional investors are planning on increasing their alternative investment holdings by 2025. Why do you think this is?

Diversification and the search for returns. The returns on fixed income are so low that they are hunting for bigger, better returns, but these come with a greater risk.

32% of institutional investors are planning on decreasing their allocations in hedge funds. Does this signal a loss of confidence in the hedge fund model?

Hedge funds don’t really hedge, but take great risks. This works when the economy is doing well, but doesn’t in an economic downturn. Too many investors chasing too few returns.

Rare whisky, classic cars, wine, and handbags have increased in value by over 100% in the past 10 years. Does this mean more investors should consider investing in luxury items?

Absolutely not. Not only do these have price risk, but there is physical risk to these assets, which would require substantial insurance. Not worth it. Haven’t we learned from Beanie Babies?

From alternative to mainstream

With ultra-high-net-worth investors devoting half their portfolios to alternative investments, it's clear that these investments are actually mainstream for the wealthy. But those are people who have access to more investment options because they're far above the average net worth. What about alternative investments for retail investors?

Among fund managers surveyed by Preqin, 15% said they offer retail investors access to alternative investments and plan to expand those offers. Another 17% didn't currently offer these investments to retail investors but planned to do so in the future.

Retail investors already have access to many types of alternative investments, such as real estate, luxury goods, and cryptocurrency. Real estate investment trusts (REITs) have become a popular way for everyday individual investors to tap into the real estate market. And there are new alternative investment funds and platforms popping up to give the average investor the ability to invest in shares of fine wine, art, cars, and so on.

For retail investors who want to add more alternative investments to their portfolio, more and more options are becoming available. And for the ultra-wealthy, alternative investments will likely continue to be an extremely popular way to invest.

Sources

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