Alt Investments Gain Momentum With Wealthy Investors, Cerulli Says

Advisors are increasingly adding alternative investments to clients’ portfolios and wealthy investors are embracing it, a new report from Cerulli Associates said.

Investors with $5 million or more in total investable assets now have an average of 9.1% of their assets allocated to alternative investing options, up from 7.7% in 2020, and advisors expect it will grow to 9.6% by 2024, according to the Boston-based research firm.

“This is an important trend,” said Chayce Horton, research analyst and a member of the wealth management team at Cerulli. “We see advisors and their clients becoming more sophisticated and wanting to have more exposure and be more aligned with the traditional higher exposures that we see from institutional investors,” he said, noting that ultra-high-net-worth high-net-worth individuals have gradually become more institutionalized over the past five years.

“We have also seen a high-level activity from the managers themselves, private equity firms and other asset management firms that have been tailoring products and distribution strategies for these investors,” he added.

Horton said one of things that he found surprising in the research is that single-family and multifamily offices have “very high” allocations to alternatives. “We found that in 2022, family offices allocations to alternatives reached 28% of client portfolio, and that’s obviously bolstered slightly by the drawdown in stock and bond valuations this year, but it’s still higher than I would have thought.” he said.    

Advisors at HNW practices, Horton said, cited portfolio diversification along with new growth opportunities as top reasons for adding alternative investments to client allocations. Also, they indicated that the allocations they are looking to increase the most over the next two years include private equity (50%), private real estate (45%), and direct/coinvesting (32%). Further, the report noted that 94% expect to maintain or grow their positions in all types of alternative investment opportunities, outside of hedge funds. Horton said up to 100 advisors at HNW practices were surveyed for the research.

Advisors also pointed out that allocating more to private capital exposures has not come without challenges. They cite lack of liquidity (52%), complexity (37%), and fees (33%) as the top hurdles. “Additionally, economic uncertainty and market headwinds have caused some investors to sit on the sidelines when it comes to new investments in the illiquid alternatives space,” the report said.