Private wealth is heading to alternatives—what’s driving it and where is it going?
Alternatives have been the preserve of institutional investors for decades but now, more than at any other time, a confluence of factors is paving the way for individual investors to be drivers of growth across the alternatives landscape going forward. We look at the factors pairing individual investors and alternatives.
Key takeaways:
- Individual wealth is growing and both mass affluent and high-net-worth investors are increasingly interested in alternative strategies and private markets.
- Three investor segments showing signs of significant growth include women, engaged first-time investors, and mass affluent investors.
- Private credit has evolved and grown exponentially over the past decade.
- New registered alternative investment vehicles are giving individual investors what they want: more liquidity and transparency.
- Market uncertainty and radical macroeconomic shifts reinforce the role of alternatives within a diversified portfolio.
1 Growth in wealth creates demand for sophisticated advice and products
High-net-worth and ultra-high-net-worth investors have long been active investors across the alternatives landscape, and this shows no sign of slowing in 2023. Alternative investments is a top priority for 49% of North American family offices, while 34% are planning to increase allocations to private credit.1
However, as wealth across segments of individual investors increases, demand for alternatives is also growing more broadly. Mass affluent wealth is expected to grow 40% between 2020 and 2025, according to EY's report on understanding the future of advice. Forecasts are for this growth to represent the biggest disruption to wealth management in decades as the gap between retail and high-net-worth is filled by an emerging mass affluent segment, many of whom are interested in more sophisticated advice and products, including alternatives. At the same time, a massive transfer of wealth is under way as baby boomer men die and assets transfer to mostly female spouses, who are often younger and have longer lifespans.
By 2030, an estimated $30 trillion in investable assets—a figure close to the annual GDP of the United States—is expected to transfer from baby boomers, according to McKinsey & Company’s review of the U.S. wealth management segment. A sizable proportion of this wealth could end up in private markets as the top choice for new products sought by wealthy individuals.
Expected growth areas in wealth management over the next decade
Source: McKinsey Global Wealth and Asset Management Practice, 2022.
2 Private credit is one of the fastest-growing segments of alternative assets
Private equity, real estate, infrastructure, and hedge fund strategies have been the core of alternatives for decades and have innovated with new styles and investable markets. Liquid alternative hedge fund strategies, which include systematic trend and global macro hedge funds, attracted significant assets from investors in 2022. However, across the alternative investing landscape, it's the growing prominence of private credit that's generating considerable interest from investors.
Private credit has taken shape and matured in the 15 years following the global financial crisis as capital adequacy requirements placed on large banks caused many to exit the market in favor of a focus on large public deals and companies. Nonbank lenders, such as asset managers, quickly filled the gap and now dominate the segment, which continues to grow at a rapid pace.
Rise of private credit
Assets under management ($ billion) 2010–2027 (forecast) by substrategy
Source: Preqin, April 2023.
Asset-based lending is a subset of private credit that uses assets as collateral, and it’s increasingly drawing investors for the differentiated returns it offers to traditional fixed income and equity, as well as for its role as a diversifier to other private credit investments. It is a sizable segment with opportunities across diverse sectors, including residential and commercial real estate, transportation and aviation financing, corporate asset-based lending, consumer loans, and healthcare.
Large addressable asset-based lending market
Source: John Hancock Investment Management, Marathon Asset Management, L.P., 2022. For illustrative purposes only. Not reflective of any fund.
Alongside increasing interest in private credit, interest in private markets generally, including real assets such as timberland and agriculture, is rising. An expected $1.3 trillion in private capital is anticipated to be allocated to private assets by 2027, according to analysis from alternatives data provider Preqin. Real assets are the most illiquid of alternative investments with long lock-up periods of often more than 10 years. Available only to qualified purchasers and institutional investors, real assets, including timberland and agriculture, are attractive for the potential for inflation protection, diversification, and uncorrelated returns.
3 Expanding landscape of alternatives vehicles
Although demand from individual investors for alternative investments has been strong and consistent over many years, one challenge has been a lack of investment vehicles that appeal, and are familiar, to individual investors. This is changing with new semi-liquid alternative vehicles from tender offer funds to business development companies (BDCs). Ultimately, the aim is to narrow the divide between private markets’ historical closed-end initial public offering structures and Investment Company Act of 1940 vehicles—such as mutual funds—which are familiar to retail investors. Liquidity and transparency are high priorities for individual investors, both of which are improved through new alternative vehicles coming to market. Regulators have also played a role, making changes that give individual investors access to the benefits of alternatives. In 2020, the U.S. Securities and Exchange Commission expanded the definition of accredited investor to include individuals with minimum standards of investment knowledge, broadening a measure that had been solely wealth based before.
4 Market uncertainty emphasizes a role for alternatives
Market uncertainty often drives investors toward alternatives for the potential of downside risk protection and we're seeing this in the way that advisors are reporting using alternatives. Reducing exposure to public markets has been the primary goal of 69% of advisors surveyed by Cerulli Associates, while around 66% state downside protection is their primary objective.
Given the focus on risk mitigation, less than half of advisors (42%) refer to enhancing returns as a priority in using alternatives. However, in less volatile markets, enhancing or differentiating returns is once again expected to emerge as a key objective for investing in the asset class. Hedging inflation has understandably increased in importance with 31% of advisors aiming to hedge inflation with alternatives, an increase from 19% in 2021, according to Cerulli Associates.
Reasons advisors are using alternatives
Goal |
% of advisors |
Reduce exposure to public markets |
69 |
Volatility dampening/downside risk protection |
66 |
Income generation |
59 |
Portfolio diversification |
52 |
Growth/enhanced return opportunity |
42 |
Inflation hedge |
31 |
Demonstrate own advisory practice value proposition |
22 |
Client requests |
19 |
Appetite for alternatives shows no signs of waning
A confluence of factors is pairing individuals and alternatives, including massive wealth transfer from baby boomers, a rising tide of greater wealth among mass affluent investors, product availability, and a challenging macroeconomic outlook that’s upturned traditional asset classes. Current retail allocations to private markets are estimated to be around 5% or 6%,4 which gives a sense of the significant growth potential that exists across noninstitutional investors. Liquid alternatives, private credit and natural resources are high-priority investment choices for both existing high-net-worth and emerging mass affluent investor segments. Wealth managers and registered investment advisors are well equipped to meet the needs of these segments as interest in alternatives grows. But the alternatives landscape can be complex; therefore, partnering with a global investment firm with an established track record of operating across alternatives markets is critical for long-term success.
Important disclosures
1 “The North America Family Office Report 2022,” Campden Wealth and Royal Bank of Canada. 2 “Private markets turn down the volume,” McKinsey & Company, 2023. 3 Preqin Special Report: The Future of Alternatives 2027, 2023. 4 McKinsey’s Global Growth Cube, 2023. “Private markets turn down the volume,” McKinsey & Company, 2023.
Alternative investments by their nature involve a substantial degree of risk, including the risk of total loss of an investor's capital. Further, alternative investments are subject to less regulation than other types of pooled investment vehicles, may be illiquid, and cannot assume that investments in the asset classes identified will be profitable or that decisions we make in the future will be profitable. Alternative investments may also involve significant use of leverage, making them substantially riskier than other investments.
Alternative investing involves substantial risk and there is an opportunity for significant losses. The products may not be suitable for all investors. Compared with a traditional mutual fund, an alternative fund typically holds more nontraditional investments and employs more complex trading strategies. Investors considering alternative mutual funds should be aware of their unique characteristics and risks. Alternative investments may also have limited performance information, low liquidity, and unproven strategies with unknown risks.
Exposure to investments in commercial real estate, residential real estate, transportation, healthcare loans, and royalty-backed credit and other asset-based lending, including distressed loans, may also subject the fund to greater volatility than investments in traditional securities. Investments in distressed loans are subject to the risks associated with below-investment-grade securities. In addition, when a fund focuses its investments in certain sectors of the economy, its performance may be driven largely by sector performance and could fluctuate more widely than if the fund were invested more evenly across sectors. The fund’s investment strategy may not produce the intended results.
This material is for informational purposes only and is not intended to be, nor shall it be interpreted or construed as, a recommendation or providing advice, impartial or otherwise. John Hancock Investment Management and our representatives and affiliates may receive compensation derived from the sale of and/or from any investment made in our products and services.
The views presented are those of the author(s) and are subject to change. No forecasts are guaranteed. This commentary is provided for informational purposes only and is not an endorsement of any security, mutual fund, sector, or index. Past performance does not guarantee future results.
MF2882272 05/23