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Interest in alternative investments has grown substantially over the last few years. We’ve been operating in this space for several years, but we continue to field more and more client questions on the topic. Access to alternatives is a growing topic in the news, but not everything described as an alternative investment behaves like one. We take a quick look at what we wish every investor knew about alternative investments.
The Problem With Being Fully Invested in Public Markets
When you buy a share of a publicly traded company, the price you pay is not necessarily a reflection of what that company is worth. It is a reflection of what other investors are willing to pay for it at that moment. On a normal day, those two things are reasonably close. During a panic, they can diverge significantly.
That is not a hypothetical. In 2008, a broadly diversified portfolio invested primarily in public markets could lose 40 percent of its value in a relatively short period. For someone with $1.5 to $2 million in retirement assets, that kind of drawdown is not just a number on a statement (Illustrative purposes only. Numbers approximate). It is hundreds of thousands of dollars gone, driven not by any fundamental change in the underlying businesses, but by the collective behavior of investors responding to fear.
The core vulnerability of public markets is that every investor can exit at any time. When enough of them decide to do that simultaneously, prices fall in ways that have little to do with the actual value of what is being sold. For investors who are entirely concentrated in public markets, that exposure is permanent.
What Alternatives Actually Are
Alternative investments are anything outside the traditional categories of stocks, bonds, and cash. That includes real estate, private equity, private credit, infrastructure, and a range of other strategies. What most of them share is that they are privately held, harder to access than public investments, and structured for investors who do not need immediate access to that portion of their capital.
A straightforward example: an investor puts $500,000 into a private real estate fund. The fund uses that capital, along with capital from other investors, to develop an apartment complex. The plan is to fill the building, stabilize the income, and sell the asset to another buyer within approximately five years. The target outcome might be $900,000 returned to the investor at the end of that period (Illustrative purposes only. Numbers approximate).
During those five years, the money is locked up. The investor cannot sell their position on a Tuesday because the market has had a bad week. Neither can any of the other investors in the fund. That structure is not incidental. It is part of what makes the strategy work.
Illiquidity and the Trade-Off
The term for what that structure produces is an illiquidity premium. When investors agree to give up access to their capital for a defined period, the manager has more room to operate. They can make longer-term decisions, take positions that take time to play out, and avoid the reactive behavior that liquid markets sometimes force. The expected return over time tends to be higher than a comparable liquid investment would produce, because the structure itself creates conditions for better decision-making.
The trade-off is straightforward. You cannot access that money while it is being used. If something unexpected happens and you need liquidity, you cannot get it quickly. That is a real constraint, and it is the primary reason alternatives are generally appropriate for investors who have the financial flexibility to set a portion of their assets aside for a defined period without disrupting the rest of their plan.
For investors who have that flexibility, the benefits are meaningful. Less exposure to the kind of sentiment-driven volatility that moves public markets. Returns that are tied more closely to the actual performance of an underlying asset than to what the market happens to be feeling on a given day.
Where REITs Fit In
A Real Estate Investment Trust, or REIT, sits somewhere between a traditional alternative investment and a public market investment. It gives investors exposure to real estate, which is typically an alternative asset class, through a structure that trades more like a stock.
A private, non-traded REIT prices its value based on actual property appraisals. The value is relatively stable and reflects what the underlying properties are actually worth. An investor in that structure accepts limited liquidity in exchange for something closer to the true economics of owning real estate.
A publicly traded REIT owns real estate, too, but it also has a ticker symbol. It trades every day, and its price is influenced by market sentiment, interest rate expectations, and broader investor behavior, not just the value of the properties it holds. It can trade at a premium or a discount to the underlying real estate’s actual value, depending on market conditions on a given day.
Both are real estate investments. The investor experience is completely different. If the reason for adding real estate to a portfolio is to reduce volatility, a publicly traded REIT may introduce more of it, not less.
What to Ask as Alternatives Become More Accessible
Access to alternative investments has expanded significantly. Platforms that once required institutional minimums are now available to a broader range of investors. Part of what has historically made alternatives valuable is that the average investor could not access them. A strategy that is not available to everyone is not subject to the same kind of mass behavior that moves public markets.
As that changes, it is worth asking whether broader accessibility changes the nature of what you are buying. If more investors can enter and exit a strategy, does that introduce the kind of behavior that alternatives were partly designed to avoid? The answer depends on the specific structure, and it is not always clear from the marketing materials.
The question that matters is not whether you can access a given strategy. The question is what the structure actually looks like. How liquid is it? Under what conditions can you exit, and when? Does the availability of liquidity change how the manager operates? Does it change what you actually own?
Understanding the structure before you are in it is the only way to make the decision with a clear picture of what you are agreeing to.
For clients who want to explore alternatives as part of a broader financial plan, WellFull works alongside B Capital, an in-house alternatives platform that operates under the same registration. In practice, that means a conversation about whether alternatives belong in a portfolio can take place in the same room as the rest of the planning relationship, with the same team, without having to start over elsewhere.
Have questions about how alternatives might fit in your portfolio? We’d love to walk you through it.
This material is for informational purposes only and does not constitute investment advice. Alternative investments involve significant risks, including illiquidity, lack of transparency, and the potential loss of principal. They are generally suitable only for investors who meet applicable suitability requirements and can bear the risk of losing their entire investment. Past performance is not indicative of future results. Please consult with a qualified financial advisor before making any investment decisions.