For clients that need to diversify their investments, advisors may want to consider reviewing what trended in alternative investments in 2024. One trend we’ve noted in 2024 is to dig into to some of the traditional asset classes, with a twist.
Recent market volatility may be driving clients into their advisor’s offices seeking alternative investments. As we’ve said before, alternative investments can be helpful in diversifying portfolios. Alternative investments driven by emotional investing are a dangerous duo that can create chaos. That makes them a two headed coin based on whose flipping it. For investors who need to diversify, alternative investments can provide a needed option. For investors with low risk tolerance, they can be a worrisome temptation. It’s a heads/tails situation with diversification at the head. Since we’ve addressed emotional investing in an article on behavioral finance this month, we’ll keep our eyes on the heads side of the coin.
There may also be a messaging issue around language on investing. Specifically, it’s a generational one. We’ve mentioned that the approach of GenZ (those born between 1997 and 2012) to investing heavily favors alternative investments.[1] It could be more than that, however. According to Bank of America Private Bank, younger investors prefer alternatives to stocks.[2] Much of these may be driven by two trends in that age group: cryptocurrency and direct social investing. It’s also possible some of the trends towards cryptocurrency and real estate, among others, reflect more of the time of the survey, rather than actual longer term trends. That is, traditional alternative investments underperformed in 2023. With that said, most clients think of alternative investments as a diversification tool, not a complete investing strategy. In fact, JPMorgan reported that funds for alternative asset classes returned to pre-pandemic levels in 2023.[3]
When clients think of alternative investments, they usually are seeking investments that have different growth trajectories than their stock-based investments, allowing them to spread risk. We classify alternative investments into three main groups: Private Equity, an illiquid asset class that seeks long-term appreciation away from public markets; Hedge Funds, investments that have broad flexibility in the types of strategies they can employ to follow their stated investment objectives; and Commodity Pools, enterprises that attract funds from people who are looking for pool managers to engage in commodity-related trades. These alternative investment classes have had some difficulties over the last few years. Hedge funds continue to outperform, the sensitivity of REITs to interest rates may lead investors away from them, and commodities stay in a favored position.[4]
For clients that need to diversify their investments, advisors may want to consider reviewing what trended in alternative investments in 2024. One trend we’ve noted in 2024 is to dig into to some of the traditional asset classes, with a twist. For example, in place of real estate, farmland. Advances in technology and machine learning have led farmers to try precision farming, which is yielding higher crops and improved soil.[5] Another example of the twist includes not just investing in commodities. Oil was a popular commodity in 2023, based on supply chain issues, but has seen less gains in 2024. Oats, on the other hand, may not have gotten as much attention. “The Oats Market grew from USD 4.83 billion in 2023 to USD 5.12 billion in 2024. It is expected to continue growing at a CAGR of 6.18%, reaching USD 7.35 billion by 2030.”[6]
Finally, bonds are so often used to diversify portfolios that we often forget to include them when discussing alternative investments. And yet, driven by strong economic predictors of growth, rates on the sometimes overlooked 10-year Treasury bond bumped up in late 2024. According to USBank “[f]ollowing interest rate cuts by the Federal Reserve (Fed) in September, the yield on the benchmark 10-year U.S. Treasury note dropped to 3.63%, its lowest point this year. By late October, the 10-year Treasury yield approached 4.3%, an increase of 0.65%.”[7]
[1] https://www.bcgbenefits.com/blog/micro-equity
[3] https://www.jpmorgan.com/insights/global-research/investing/alternative-investments
[4] https://www.jpmorgan.com/insights/global-research/investing/alternative-investments
[5] https://www.cnn.com/cnn-underscored/money/alternative-investments
[6] https://finance.yahoo.com/news/oats-market-global-instant-oats-100700146.html
[7] https://www.usbank.com/investing/financial-perspectives/market-news/interest-rates-affect-bonds.html
These articles are prepared for general purposes and are not intended to provide advice or encourage specific behavior. Before taking any action, Advisors and Plan Sponsors should consult with their compliance, finance and legal teams.
Before leaping into the unknown, we recommend a thorough examination of your plan. Because we are experts in the field, we know the marketplace and know what your existing vendor is capable of offering. Through this examination, we can help you optimize the service you receive.
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