Alternative investments such as private equity, venture capital, hedge funds, managed futures, art and antiques, and cryptocurrencies are becoming increasingly popular for registered investment advisors (RIAs). RIAs are always looking for ways to diversify their clients’ portfolios beyond just stocks and bonds. With interest rates still low, investors are searching for assets that can provide higher returns and some diversification benefits. Private equity funds have emerged as one of the top performing alternative investments for RIAs.
Private equity continues to provide strong returns for RIAs and their clients
The data shows that private equity has consistently outperformed public markets over the past decade. Top-quartile private equity funds have delivered net returns of 15-20% annually. This significantly beats the S&P 500’s annualized return of around 10% over the same period. As a result, client portfolios with 15-20% allocated to private equity have seen a meaningful boost in overall performance. Many RIAs have steadily increased their clients’ exposure to private equity over the years. The illiquidity premium, access to top tier GPs, and leverage inherent in private equity has produced excellent risk-adjusted returns.
Private credit also gaining popularity as private debt funds fill lending void
With banks retreating from certain types of middle-market lending, private credit funds have stepped in to fill the void. Private credit encompasses funds that invest in private loans, high-yield bonds, distressed credit, and other non-bank debt instruments. These private debt investments generate relatively high yields due to their illiquidity premiums and specialized underwriting capabilities. Many RIAs have allocated 15-20% of fixed income portfolios to private credit funds in order to enhance yields. The floating rate nature of private debt also provides an attractive hedge against rising interest rates.
Venture capital funds tap into technology growth trends
Venture capital funds that invest in early stage technology companies have produced huge winners over the past decade. RIAs have seen Ellis, Sequoia, IVP, and other top-tier VC funds generate stellar returns by investing in unicorns like Airbnb, Dropbox, Uber, Lyft, and Pinterest early on. Although the VC landscape is highly competitive now, leading venture funds still possess the networks, expertise and access to find the next generation tech winners. Many RIAs today have 5-10% allocated to venture capital in client portfolios.
Hedge funds provide diversification but have lagged lately
Hedge funds were once the hottest alternative investment for RIAs and their clients. But net returns for the average hedge fund have trailed the S&P 500 greatly over the past 10 years. Still, some RIAs continue to use hedge funds in small doses for diversification benefits. Strategies like equity market neutral, relative value arbitrage, distressed investing, and macro can zig when stock markets zag. But the hedge fund universe is vast, complex, and riddled with mediocrity. Top quartile hedge funds are still worth considering but require rigorous due diligence.
Managed futures funds provide crisis alpha
Managed futures involve investing in liquid futures and forward contracts across equities, commodities, currencies and fixed income. Top systematic macro managers have the ability to profit from both rising and falling markets. Many RIAs allocate a 5-10% sleeve to managed futures in client portfolios. These strategies generate uncorrelated returns and significant tail risk hedging properties. Managed futures funds provided strong crisis alpha during the 2008 financial crisis. Trend following strategies also tend to perform well during inflationary periods.
In summary, private equity and private credit funds have emerged as the top performing ria alternative investments in recent years. Allocations to top-tier venture capital and managed futures strategies can also enhance portfolio diversification. Hedge funds have lagged but a small allocation to top managers may still be warranted.