Alternative investments are becoming more mainstream as investors seek ways to diversify their portfolios, generate outsized returns, and preserve capital.
As more and more investors become interested in alternative investments, there is a growing demand for products that offer exposure to these less traditional asset classes. The number of alternative investment platforms has risen steadily over the past decade. This trend will continue in the years ahead as investors look for new ways to gain exposure to an array of alternative assets.
The chart below illustrates how the market for alternative investments is growing tremendously quickly.
The existing alternative investment market is dominated by institutional investors who have access to high-net-worth individuals (HNWI) clients and are comfortable with the highly regulated environment surrounding these products. These institutions can afford to take on higher levels of risk than individual investors because they can withstand large drawdowns without negatively impacting their performance fees with their asset management teams.
This article will discuss how mainstream alternatives, including on-ramps, index companies, a favorable regulatory environment, low rates, and value capture, shift to private markets.
The rise of alternative investment on-ramps has been a game-changer.
In the past, high-net-worth investors (HNWI) had to build their infrastructure and teams to invest in alternative markets. Now, with platforms like Gridline, it’s easier for individual investors to start investing in alternative assets.
To give a few more examples, Coinbase is a popular on-ramp for crypto, MasterWorks is an on-ramp for art, Republic is an on-ramp for early-stage private companies, and Forge is an on-ramp for late-stage private companies.
These on-ramps make new asset classes accessible, thus changing the investment landscape.
Index companies are also crucial in making alternative investments more mainstream.
They create indices in their respective marketplaces (whether private equity, real estate, venture capital, or something else entirely) and potentially become critical infrastructure for investors.
The ability to create an index is a sign of institutionalization, which can be a critical component in attracting new assets under management (AUM). This has important implications for the mainstream adoption of alternative investments.
Individual investors are generally risk-averse and have a limited appetite for illiquid assets. They need to see a viable path into these asset classes before they allocate capital. Creating an index provides this reassurance, as it signals that the asset class has achieved sufficient scale to justify the investment required to build the index.
Favorable Regulatory Environment
The current regulatory environment has made it easier for alternatives to gain traction as an asset class.
The Securities and Exchange Commission’s Regulation CF, part of the Jumpstart Our Business Startups Act, or JOBS Act, has helped tremendously in this regard.
Before the JOBS Act, alternative investments were mainly unavailable to retail investors because they were only available in private deals. The JOBS Act changed that by allowing accredited and non-accredited (retail) investors access to a broader range of alternative investments across various asset classes. This allowed private companies to raise $5 million from all Americans.
Low-interest rates have also played a significant role in making alternatives more attractive as an investment option for individual investors. With low-interest rates, investors have flocked to alternative investments that promise higher returns.
The low-rate-fueled popularity of alternatives as an investment option is expected to continue into the foreseeable future.
Value Capture Shifting To Private Markets
Another reason alternatives have become more mainstream is that value capture is shifting out of public markets and into private markets, where opportunities exist for better returns without taking on excessive risk.
Private markets have grown tremendously in recent years. Real assets effectively doubled the size of the global wealth pool last year.
As people become wealthier, they will want access to alternative investments that can help them generate returns beyond public markets. The growth of private markets shows no sign of slowing down.
The number of alternative investment strategies available is proliferating, with new offerings being introduced all the time—there are now hundreds of alternative investment strategies globally—and this number will only increase as new products emerge due to advancements in financial technology.
Investing in alternatives offers investors a wide range of investment options beyond what’s available on public markets, which can be helpful in tailoring risk/return profiles or meeting specific goals such as preserving capital during market volatility. With Gridline, achieving these benefits becomes effortless.