What Are Alternative Investments—and Should You Be Invested in Them?

Alternative investments can play a role in some portfolios when an investor has a long time horizon, sufficient liquidity elsewhere, and a clear purpose for the allocation. Because alternatives can be less transparent and harder to sell, they should be evaluated within a comprehensive financial plan—not as a shortcut to higher returns.

If you’ve followed financial markets for any length of time, you’ve probably heard the term alternative investments. Sometimes they’re presented as sophisticated tools for wealthy investors. Other times they’re marketed as a solution to stock market volatility—or even as a way to “beat the market.”

So what are alternative investments, really?
And more importantly: should you actually own them?

As a St. Louis–based financial advisory firm, this is one of the most common and misunderstood questions we hear. The answer is rarely a simple yes or no. It depends on what the alternative investment is, why it’s being considered, and how it fits into a broader financial plan.

Let’s break it down—plain English, no hype.

What Are Alternative Investments?

In broad terms, alternative investments are assets that fall outside traditional stocks, bonds, and cash.

Common categories include:

• Private equity (ownership in private companies)

• Private credit (lending outside public bond markets)

• Real assets (real estate, infrastructure, farmland, timber)

• Hedge fund strategies (long/short, market neutral, arbitrage)

• Commodities (energy, metals, agriculture)

• Digital assets (such as cryptocurrency—though we will not address that in this article)

Unlike publicly traded stocks or mutual funds, many alternative investments are:

• Less liquid

• Less transparent

• More complex

• Subject to different regulatory frameworks

That doesn’t make them bad—but it does mean they must be evaluated carefully.

Why Do Investors Consider Alternatives?

Historically, alternatives have been used for three main reasons:

1. Diversification

Some alternative investments behave differently than stocks and bonds, particularly during periods of market stress. That can reduce portfolio volatility—but only if the alternative truly has a low correlation to traditional assets.

2. Return Potential

Certain alternatives may offer higher expected returns than public markets—but usually in exchange for:

• Illiquidity

• Complexity

• Longer time horizons

• Higher risk

There is no free lunch.

3. Income Generation

Private credit, real estate, and infrastructure investments may generate ongoing income—but those cash flows are not guaranteed and can change quickly in stressed environments.

The Trade-Offs Most Investors Miss

This is where the conversation often gets incomplete.

Illiquidity Is Real

Many alternative investments require you to lock up capital for years, not months. Even investments with periodic redemption windows may suspend withdrawals during market stress—often precisely when investors want liquidity most.

Valuations Can Lag Reality

Unlike public markets, alternatives are often valued quarterly (or less frequently). That can create the appearance of lower volatility—when in reality, price discovery is simply delayed.

Fees Matter—A Lot

Alternatives frequently come with layered fees:

• Management fees

• Performance fees

• Fund-level expenses

• Underlying investment costs

These fees don’t make an investment bad—but they raise the bar for it to add value.

Complexity Increases Behavioral Risk

If you don’t fully understand how an investment works, it becomes much harder to stay disciplined when markets get uncomfortable.

Investors often focus on expected returns, but real-world outcomes are driven just as much by behavior and risk management. We explore this further in our article [Understanding Portfolio Risk Beyond Volatility], where we break down why some portfolios feel stable on paper—but behave very differently during market stress.