Traditional investments like stocks and bonds have been popular for a long time. But alternative investments like private equity, hedge funds and real estate have become more common in investor portfolios. This article compares traditional and alternative investments across liquidity, fees, risks, returns and other factors. We also dive into private equity specifically as a major alternative investment type. There are key tradeoffs to consider between the investment liquidity, fees, transparency, risks and historical returns. Investments like private equity can boost portfolio diversification but have higher costs and risks.
Alternative investments have much lower liquidity than traditional investments
Stocks and bonds traded on public exchanges offer daily liquidity. But alternatives like private equity and hedge funds often have lock-up periods where investors cannot redeem capital for 1-3 years after investing. There are also redemption notice periods. So alternatives have far lower liquidity than traditional investments.
Higher fees are common with alternative investment strategies
Alternative investments usually charge higher management fees in the 1-2% range rather than 0.5% or below for traditional assets. There are also performance fees above a hurdle rate. Complex fee structures like management fees on committed capital rather than assets under management are common for private equity.
More concentrated portfolios increase risks for alternative investments
Many alternative strategies focus on specific niches and have just 10-30 positions. But traditional mutual funds often hold hundreds of securities to diversify risks. So the portfolio concentration amplifies risks for alternatives.
Historical return data limitations create uncertainties
Stocks and bonds have reliable long-term return data. But alternatives have a much shorter track record. The data limitations make risk and return analysis more challenging for alts. Issues like survivorship bias also overstate historical returns.
Private equity requires large upfront commitments from investors
Unlike purchasing individual stocks, private equity investing needs large upfront commitments that get drawn down over several years as deals are completed. So private equity requires a long-term focus and has capital constraints.
Alternative investments can boost portfolio returns and diversification. But lower liquidity, higher fees, concentration risks and data limitations need consideration especially for private equity. The tradeoffs versus traditional investments depend on investment goals and constraints.