By: Venkatesh Holihosur, Associate Principal Business Analysis, Capital Markets

In times of market unpredictability, alternative investments offer a valuable advantage by showing minimal correlation with traditional financial markets, helping to shield portfolios from volatility. The year 2023 was particularly turbulent, with notable market fluctuations and a sharp rise in interest rates. As a result, wealth managers have been turning to private markets and alternative investments more frequently, seeking greater diversification and the potential for enhanced returns as a strategy for navigating uncertainty.

The rise of alternative investments

Here are some of the alternative investments that are likely to surge in popularity:

Infrastructure

Infrastructure investments are gaining attention as favored assets because of their minimal correlation with other asset classes and their capacity to generate stable, long-term income. The growth of infrastructure investments is expected to surge, especially within the energy sector, where low-carbon energy sources are anticipated to account for 70% of global energy demand by 2050. ‘Infrastructure investing’ has seen a substantial rise in the last 15 years, increasing from US $150 billion to US $1.3 trillion.

Infrastructure investment is being drastically reshaped due to innovations in energy, mobility, digitalization and growing adoption of AI and digital infrastructure that requires more data centers. In some cases, new types of infrastructure assets will require investors to manage higher levels of risk with closer scrutinization of an asset’s risk/return profile.

Furthermore, emerging technologies, including 5G telecom networks and data centers, present promising opportunities within infrastructure. However, in the near term, investors may encounter negative cash flows and face notable risks related to development and technology.

Private debt

The U.S. financial landscape is experiencing major structural changes, which are affecting both deposit and credit markets. The private debt market is projected to grow to US $3 trillion in assets under management (AUM) by 2028, driven by shifting investor preferences, the desire for diversification, changes in the public debt market, and a reduction in bank credit availability. Additionally, this asset class offers protection against rising interest rates and inflation.

Private equity

In 2023, private equity deal activity declined compared to prior years, driven by rising interest rates, persistent inflation, and global geopolitical instability. The combination of market volatility and elevated interest rates also pressured deal valuations. With uncertainty looming, many investors are opting to retain their current holdings rather than seeking new ventures. However, the secondary market is seeing a rise in activity, fueled by appealing valuations and the liquidity needs of investment partners.

Real estate

Real estate has traditionally shown resilience in turbulent and challenging markets like the one we’re experiencing now. However, transaction volumes have decreased due to the rising cost of capital. In the third quarter of 2023, US commercial real estate investments dropped by 54% year-over-year, totaling US $82 billion. Despite this, the housing market is being notably influenced by the aging of millennials and baby boomers, which is fueling a growing demand for multi-family apartments and suburban single-family homes.

Other assets

The global arts market experienced substantial growth, rising from US $441 billion in 2022 to US $579 billion in 2023, reflecting a compound annual growth rate of 31%. Art valuations remain largely unaffected by broader economic conditions. Fractional ownership of art, enabled by the tokenization of art using blockchain technology and AI-driven valuation, is also lowering barriers to high-value art. Art as an investment offers portfolio diversification that buffers against portfolio volatility as art valuation does not have a direct correlation to stocks, bonds and other traditional financial assets. In turbulent financial markets, choosing to invest in art can be a stabilizing factor in an individual’s investment portfolio serving as a hedge against inflation.

Additionally, technological innovations have paved the way for cryptocurrencies to become a prominent asset class, offering a strong alternative for diversification. The introduction of a Bitcoin spot exchange-traded fund (ETF) this year is expected to drive increased interest in digital assets, particularly among traditional investors.

It is notable that a Bitget study from April 2023 discovered that 46% of millennials across several major economies, including the US, China, Germany, Japan, Indonesia and Nigeria, own cryptocurrencies.

Moreover, according to a recent survey by Policygenius one in five American adults own cryptocurrencies. This shift indicates that younger investors have a growing interest in diversifying through alternative investments illustrating a shift in financial investment strategies, going beyond traditional stocks and bonds.     

Factors driving alternative investments

The growth of alternative investments and access to private markets will be driven by several key factors:

• Enhancing current platforms with open architectures and APIs to seamlessly integrate with fintech tools, enabling alternative investments to be incorporated into the broader investment ecosystem.
• Leveraging AI, machine learning, and generative AI to streamline regulatory compliance, reporting, and legal processes in alternative investments, helping to meet ever-evolving industry demands.
• Using generative AI and predictive analytics to anticipate market trends and risks, providing critical insights to support more informed decision-making in alternative investment strategies.
• Adopting a decentralized blockchain platform with asset tokenization for better management of alternative assets. This network would ensure transparency, compliance, and cost-effectiveness, while also promoting scalability, simplifying operations, and reducing the risk of fraud, thus democratizing access to private markets.

Key takeaways

Private markets present tremendous growth potential, particularly in times of market volatility, as economic and investment trends push more investors toward alternative assets. Diversification and lessons drawn from past events play a key role in shaping investment strategies. However, the fundraising landscape has become tougher, prompting investors to be more discerning in their choices. As a result, the amount of capital available, or “dry powder,” across various asset classes has seen a substantial rise, with private equity reaching a record US $3.9 trillion by the end of 2023. Among the top investment options, private debt has taken the lead, while infrastructure and real estate continue to hold long-term appeal.

In conclusion, traditional platforms may find it challenging to keep pace with the growing demand for alternative asset investments. To successfully integrate private markets, wealth managers and investors must prioritize scalability, transparency, compliance, and cost-efficiency. As new-age technology companies and fintech firms rapidly gain ground, incumbents must act quickly to capitalize on this evolving landscape. Technological advancements will play a pivotal role in creating innovative digital products, streamlining internal processes, and expanding access to alternative assets. Ultimately, technology has the power to transform this sector by enhancing user experience, boosting efficiency, democratizing private market access, and simplifying operations.

References

1. Infrastructure investing will never be the same, Marcel Brinkman, Vijay Sarma, McKinsey & Company, August 1, 2022
2. Generation Z and millennials choose crypto over stocks — Report, Nancy Lubale, Cointelegraph, April 12, 2024
3. The Future Of Fine Art And Alternative Assets: Trends To Watch, Chris Hallewell, Forbes, Feb 7, 2025
4. Future of Asset and Wealth Management, 2024 and Beyond Report, LTIMindtree, July 2024