Alternative investments can play an important role in modern portfolios, offering a range of potential compelling benefits—such as enhanced income, added diversification, and the ability to navigate volatility—in exchange for trade offs, such as reduced daily liquidity. Institutions have long recognized this potential, often allocating significant portions of their portfolios to alternatives. Individual investors, however, have historically had limited access to private markets. While allocations have increased in recent years, individual investors still tend to have smaller allocations to alternative assets in comparison to institutions. However, it is important to note that alternative investments come with their own set of risks, so each individual investor should consider their personal circumstances and risk tolerance before making such investments.
Individual investors often perceive private markets as high risk, yet alternatives can help to mitigate various risks through diversification, the prospect of stable income, and exposure to non-traditional assets, fostering the potential for a more resilient portfolio.
Market risk—tied to specific companies, industries, or assets—can be managed through diversification. Alternatives, with their lower correlation to traditional bond and equity markets, may offer benefits here2. This can be especially important during periods of financial instability, when correlations across traditional assets have historically increased, potentially limiting the diversification benefits that investors often rely on. For instance, bond-equity correlations shifted from -0.25 pre-COVID to +0.74 post-COVID—a dramatic reversal that significantly reduced the protective effect of traditional diversification. In such environments, alternatives that are less tethered to broad market movements can help in preserving portfolio balance and mitigating downside risk amid heightened volatility.
Figure 2
Additionally, the impact of volatility on alternatives has historically been muted in comparison to public assets. From September 2015 to December 2024, private equity’s annualized volatility was 9.29%, compared to 16.76% for the S&P 500.
Interest rate fluctuations threaten fixed income values and yields. Some alternative investments, such as direct lending, utilize floating-rate structures, which can help to mitigate the impact of changing interest rates as market cycles evolve. Such structures allow the income generated by these investments to adjust with rate changes, providing a measure of resilience against interest rate volatility.
As shown below, a 1% rise in interest rates would be expected to have no price impact on floating rate notes in this example, while traditional fixed income securities would experience meaningful declines. Additionally, we see that direct lending generated an annualized total return of 9.5% during the most recent period of falling and/or flat interest rates (September 30, 2019 to March 31, 2022), outperforming traditional asset classes like leveraged loans and investment grade bonds.
Concentration risk grows when portfolios over-rely on select sectors or assets. This risk is particularly relevant in public equity markets, where a growing concentration of value in a small number of companies can undermine diversification efforts. A decade ago, the ten largest companies accounted for just 14% of the S&P 500; today, they account for 35.8%, with 26.7% in the top five alone.
As public equity markets become increasingly concentrated, achieving true diversification with public assets alone becomes more challenging. This underscores the importance of exploring alternative investments, which can provide exposure to a broader range of assets and reduce reliance on concentrated public markets. And the private market opportunity is remarkably vast: 87% of U.S. companies with $100 million or more in revenue are private.
Investors may voice concerns that companies accessing private markets are smaller and present greater credit risk compared to firms tapping into public markets. While it is true that private markets can include smaller borrowers, the reality is that private market borrowers come in all sizes, ranging from emerging businesses to well-established enterprises. Furthermore, managers can strive to manage credit risk by applying a disciplined approach to help ensure private market investments are carefully curated to balance risk and reward.
| Top 25% | |
| Median | |
| Bottom 25% |
| Public equity |
|---|
|
Top 25% 12.7%
|
|
11.4% 11.4%
|
|
9.1% 9.1%
|
| Public fixed income |
|---|
|
1.8% 1.8%
|
|
1.3% 1.3%
|
|
0.6% 0.6%
|
| Public real estate |
|---|
|
6.2% 6.2%
|
|
5.0% 5%
|
|
3.4% 3.4%
|
| Private equity |
|---|
|
33.7% 33.7%
|
|
17.9% 17.9%
|
|
5.2% 5.2%
|
| Private credit |
|---|
|
15.6% 15.6%
|
|
9.7% 9.7%
|
|
-0.7% -0.7%
|
| Private real estate |
|---|
|
20.1% 20.1%
|
|
11.1% 11.1%
|
|
2.1% 2.1%
|
Past performance is not indicative of future results.
Vintage risk is another critical consideration. The vintage year matters for private market investors since market conditions and valuations can vary significantly across different time periods.
Liquidity remains a focus for many investors interested in private markets. With the advent of new structures designed for individuals, liquidity has become more accessible in some cases. Importantly, limiting redemptions to a set amount ensures that redemptions can be paid out of liquid assets or cash, potentially protecting longer-term illiquid assets from being sold at a discount. Plus, the illiquid nature of private markets can help shield long-term investors from the possible pitfalls of trading during times of market panic. However, investors should also be mindful that limited liquidity may restrict access to capital during such periods. Illiquidity, in this context, can act as a behavioral guardrail that discourages impulsive selling when volatility spikes and headlines drive fear. By reducing the temptation or ability to exit positions hastily, illiquid structures can help investors stay committed to long-term strategies and avoid crystallizing losses at inopportune moments. Lastly, investment minimums are trending downwards, creating opportunities for investors to create diversified alternatives allocations with less capital. Still, minimums and structures vary, and diversification does not ensure a profit or protect against a loss.
Figure 10
| GP/LP | Evergreen funds | Mutual funds | |
|---|---|---|---|
| Cell label Structure | Cell label Closed-end, limited partnership | Cell label Open-end | Cell label Open-end |
| Cell label Investor eligibility | Cell label Qualified Purchaser | Cell label Accredited Investor | Cell label Any investor |
| Cell label Investment minimum | Cell label Varies, typically starting at $5 million | Cell label Varies, typically starting at $25,000 | Cell label Varies, ranging from $1,000 to $100,000 |
| Cell label Pricing | Cell label Quarterly | Cell label Quarterly or monthly | Cell label Daily |
| Cell label Performance reporting | Cell label Closed-end, limited partnership | Cell label Quarterly or monthly | Cell label Quarterly or monthly |
| Cell label Capital deployment / funding | Cell label Multi-year commitment | Cell label Immediate deployment upon investment | Cell label Immediate deployment upon investment |
| Cell label Liquidity | Cell label None, typically 10-year lock-up period | Cell label Periodic, typically quarterly | Cell label Daily |
| Cell label Tax reporting | Cell label K-1 | Cell label 1099 | Cell label 1099 |
| Cell label Fund life | Cell label Typically, 10 or more years | Cell label Indefinite | Cell label Indefinite |
Alternative investments can address key investment risks by enhancing diversification, providing opportunities for stable income and offering access to non-traditional asset classes. By thoughtfully exploring these dynamics, investors can help position their portfolios for long-term success in an increasingly complex market environment.
For more insights about opportunities in the private markets, visit wealth.blueowl.com/thenest.
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Endnotes
Important information
Unless otherwise noted the Report Date referenced herein is as of December 31, 2024.
Past performance is not a guarantee of future results.
Assets Under Management (“AUM”) refers to the assets that we manage, and is generally equal to the sum of (i) net asset value (“NAV”); (ii) drawn and undrawn debt; (iii) uncalled capital commitments; (iv) total managed assets for certain Credit and Real Assets products; and (v) par value of collateral for collateralized loan obligations (“CLOs”) and other securitizations.
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Performance Information:
Where performance returns have been included in this material, Blue Owl has included herein important information relating to the calculation of these returns as well as other pertinent performance related definitions.
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