What are alternative investments?
Alternatives refer to investments that fall outside the traditional universe of investment categories. It’s important to distinguish between alternative assets and alternative structures:
Alternative assets differ from conventional assets such as stocks, bonds and cash. Unconventional strategies are often employed to manage these assets, such as leverage or short selling. They can be less liquid and may have lower correlation with traditional markets. Examples include:
- Hedge funds: pooled investment vehicles that employ diverse strategies and techniques to seek returns in varying market conditions
- Real assets: infrastructure and property, including toll roads, utilities, renewable energy projects, and various forms of real estate
- Collectibles: tangible, often passion-driven assets such as vintage wine, fine art, rare watches or classic cars
- Digital assets: blockchain-based digital tokens like bitcoin and Ethereum – still highly speculative and volatile.
Alternative structures, by contrast, refer to investment vehicles that may hold both traditional and non-traditional asset types. Typically less liquid with lock-ups of up to 10 years, they include:
- Private equity and venture capital: investments in privately held companies – mature businesses (private equity) or early-stage startups (venture capital), often in tech or biotech
- Private credit: also known as private debt, these are non-bank loans made to companies, often offering higher yields but more complexity than traditional bonds.
Key trends
Investing in alternatives typically involves longer time horizons, lower liquidity and specialised expertise. With less regulation and higher barriers to entry, these investments have traditionally been the preserve of institutional and ultra-high net worth investors.
The move into this space was pioneered by large North American endowments – such as Harvard University and the Ontario Teachers’ Pension Plan – which sought long-term growth through investments in private equity, private credit, hedge funds and real assets. Their strong returns prompted family offices to follow suit.
Today, the appeal of alternatives is extending into the broader wealth management space, reaching a wider audience of sophisticated individual investors.
Several factors support this trend:
- Low real yields on traditional fixed income have increased demand for higher-returning strategies
- Institutional allocations to alternatives continue to rise
- Tighter bank regulations have created space for private credit managers to provide tailored lending solutions
- New investment vehicles – such as interval funds, feeder funds and semi-liquid structures – are making alternatives more accessible
- Companies are choosing to stay private for longer, bypassing traditional initial public offerings (IPOs) altogether
- Increasing regulatory burdens have made public markets less attractive, contributing to a global decline in listed companies (except in a few markets like India).
Role of alternatives
Alternative investments can play a strategic role in building more resilient portfolios. Their primary value lies in diversification – delivering returns that are uncorrelated with the ups and downs of traditional equity and bond markets. By behaving differently across market cycles, alternatives can help smooth overall portfolio performance and improve risk-adjusted returns.
For example, private equity offers exposure to dynamic companies and innovative sectors not represented in listed markets, while real assets such as infrastructure and property can offer a degree of inflation protection. Hedge funds could generate returns across a range of market conditions. Private credit, meanwhile, has become a compelling source of yield, with the potential for lower volatility than traditional high-yield bonds.
There’s also a broader economic benefit: private markets channel capital into areas that drive innovation and long-term growth. Venture capital backs breakthroughs in fields like biotech and AI. Infrastructure funds support the development of essential public services. These investments support entrepreneurship, job creation and economic development.
In South Africa, a more active private investment ecosystem could be transformative – unlocking funding for local entrepreneurs and enabling growth beyond the listed space.
Important considerations
From an investment point of view, the benefits of alternative investments come with trade-offs:
- Many offer limited liquidity and require longer lock-up periods
- They can be more complex, with less transparent valuations and reporting standards
- Costs tend to be higher, with layered management and performance fees
- Regulatory and tax considerations can vary widely across jurisdictions and structures, requiring professional advice.
Solid track record
At Sanlam Private Wealth, we’ve been active in the alternatives space for several years – particularly in private equity, private credit and hedge fund strategies. While we already have a solid track record in this area, we’re continuously developing our offering to give clients broader access to compelling private market opportunities.
Alternatives aren’t a substitute for traditional investments. However, they can play an important supporting role in a well-diversified portfolio. Their inclusion can help smooth returns over time, reduce portfolio volatility and tap into opportunities unavailable through conventional routes.
That said, they’re not without their challenges – they require careful analysis, a long-term investment horizon and a clear understanding of the unique risks involved. DM
For more information, please visit Sanlam Private Wealth.
Author: Reginald Labuschagne, Head of Product and Strategy