Investments Worth the Risk

You might know that the ultra-rich have access to some fancy alternative investments that the rest of us don’t, like exclusive wine collections, top-notch art pieces, and shares in private firms.

What Do the Ultra-Rich Invest In?

But what you might not know is how much of their portfolios are actually invested in these types of assets. If you’re an ultra-high-net-worth individual with a net worth of $30 million or more, chances are that alternative investments make up half of your assets. Meanwhile, for the average investor, it’s just 5%. So, it’s safe to say that the ultra-rich have a different game plan when it comes to investing.

The Ultra-Wealthy and Alternative Investments

Let me share some juicy info on how the ultra-wealthy are incorporating alternative investments into their portfolios. So, in 2020, ultra-high-net-worth investors had half of their assets invested in alternative investments. And, it’s not just a one-off thing – a whopping 81% of these investors have alternative assets in their portfolios.

Private Equity Outperforms the S&P 500

Now, here’s something interesting. Private equity is the only alternative investment that outperformed the S&P 500. And, globally, about a third of investors hold alternative investments. It’s estimated that by 2025, the total amount of alternative investments under management will reach a whopping $17.2 trillion.

Examples of Alternative Investments

The ultra-wealthy are definitely putting their money into alternative investments. Who knows, maybe you’ll join their ranks soon and follow their lead! Let me give you some examples of alternative investments.

There’s private equity, where you invest in private companies, real estate, where you can buy property or invest in real estate investment trusts (REITs), hedge funds, which are pools of investment capital managed by professionals, and private credit, which is investing in debt issued by private companies.

And, if you’re feeling fancy, you can even invest in rare whisky, art, watches, coins, or cars. Yes, you heard that right! These are also considered alternative investments because they are tangible assets that hold value.

Impressive Returns from Alternative Investments

Some of these investments have produced some pretty impressive returns! For example, private equity investments can yield returns of over 300% if the company performs well and is eventually sold for a profit.

Real estate has also been known to deliver high returns, especially if the property is bought at a low price and then sold for a significant profit.

Hedge funds have also been known to deliver high returns, especially during market downturns, when the fund’s investments in alternative assets provide a buffer against market volatility.

In terms of tangible assets, investing in rare whisky has seen returns of over 550% in some cases, especially if the bottle is extremely rare and in high demand.

Art investments can also yield high returns, especially if the artist’s popularity grows and demand for their works increases.

Watches, coins, and cars can also produce high returns if they are rare, in high demand, and in good condition.

The Difference Between Everyday Investors and the Ultra-Wealthy

So, you might be wondering how the everyday investor stacks up against millionaire and multi-millionaire investors when it comes to alternative investments. Well, according to a survey from the Chartered Alternative Investment Analyst Association, retail investors typically only have about 5% of their portfolios in alternative investments.

But, among millionaire and multi-millionaire investors, it’s a whole different story. A survey from global investing firm KKR found that high-net-worth investors, those with a net worth of at least $1 million, allocated 26% of their assets to alternative investments in 2020.

And, ultra-high-net-worth investors, those with a net worth of at least $30 million, had a whopping 50% of their assets in alternative investments!

The Ultra-Wealthy’s Game Plan for Investing

The ultra-wealthy are definitely putting their money into alternative investments. Who knows, maybe you’ll join their ranks soon and follow their lead! Let me give you some examples of alternative investments.

There’s private equity, where you invest in private companies, real estate, where you can buy property or invest in real estate investment trusts (REITs), hedge funds, which are pools of investment capital managed by professionals, and private credit, which is investing in debt issued by private companies.

And, if you’re feeling fancy, you can even invest in rare whisky, art, watches, coins, or cars. Yup, you heard that right! These are also considered alternative investments because they are tangible assets that hold value.

Potential High Returns from Alternative Investments

Some of these investments have produced some pretty impressive returns! For example, private equity investments can yield returns of over 300% if the company performs well and is eventually sold for a profit.

Real estate has also been known to deliver high returns, especially if the property is bought at a low price and then sold for a significant profit.

Hedge funds have also been known to deliver high returns, especially during market downturns, when the fund’s investments in alternative assets provide a buffer against market volatility.

In terms of tangible assets, investing in rare whisky has seen returns of over 550%% in some cases, especially if the bottle is extremely rare and in high demand.

Art investments can also yield high returns, especially if the artist’s popularity grows and demand for their works increases. Watches, coins, and cars can also produce high returns if they are rare, in high demand, and in good condition.

A Different Playing Field for Everyday Investors

So, what are these wealthy investors putting their money into? Well, that’s a good question. But, from the data, it seems like they’re investing heavily in alternative investments, as a way to diversify their portfolios and potentially increase their returns.

It just goes to show that when it comes to investing, the rich really do play by different rules.

But, don’t let that discourage you! Alternative investments can still be a great option for everyday investors, and with a little research and due diligence, you can potentially find some investment opportunities that work for you.

ASSETSHIGH-NET-WORTH INVESTORSULTRA-HIGH-NET-WORTH INVESTORS
Listed equities
49%31%
Fixed income
22%
10%

Alternatives
26%
50%

Cash
2%
9%
Data source: KKR (2021)

Investment Strategies of High-Net-Worth Families Revealed

So, what do high-net-worth families actually invest in? Well, according to KKR’s survey, these families have 31% of their assets in listed equities, making it the largest portion of their investments.

Next up, we have private equity, with high-net-worth families allocating 27% of their assets towards this type of alternative investment. And, just like many Americans, they also put a portion, 11% to be exact, of their assets towards real estate investing.

It’s interesting to see how these families allocate their assets and what types of investments they’re drawn to.

Of course, every family’s investment strategy will look a little different, based on their unique goals and risk tolerance. But, it’s always fascinating to see what the wealthy are doing with their money.

ASSET CLASSALLOCATION AMONG HIGH-NET-WORTH FAMILIES
Listed equities31%
Private equity
27%
Real estate
11%
Fixed income
10%
Cash
9%
Hedge funds
6%
Private credit
4%
Other real assets
2%
Data source: KKR (2021).

Who’s Investing in Alternative Investments?

So, who’s actually investing in alternative investments? Well, according to the 2021 EY Global Wealth Research Report, 32% of investors worldwide currently hold alternative investments.

The report also breaks down usage levels by different demographics, including net worth, age, and location. And what they found is that usage of alternative investments really varies, depending on these factors.

When it comes to net worth, EY classified investors into four different groups. And, as you might expect, the usage of alternative investments rises for each group.

In fact, among ultra-high-net-worth investors, a whopping 81% of them have alternative investments in their portfolios.

It’s fascinating to see how the usage of alternative investments can vary so much, depending on the investor’s wealth, age, and location.

And, of course, this information can be really helpful in understanding how different types of investors approach alternative investments.

NET WORTH LEVELCURRENT USAGE LEVEL OF ALTERNATIVE INVESTMENTSESTIMATED USAGE LEVEL BY 2024

Mass affluent
14%32%
High-net-worth
29%46%
Very-high-net-worth
55%68%
Ultra-high-net-worth
81%85%
Data source: EY (2021).

A Missed Opportunity for Diversification?

Having said that, it seems that North America is a little behind the times when it comes to alternative investments.

I mean, don’t get me wrong, the stock market has been killing it there, but sometimes it’s good to diversify your portfolio, you know?

Apparently, only a small percentage of investors in North America are opting for alternative investments, but I bet that’s going to change soon enough. People are always looking for new ways to maximize their returns and hedge against inflation.

REGIONCURRENT USAGE LEVEL OF ALTERNATIVE INVESTMENTSESTIMATED USAGE LEVEL BY 2024
Global
32%48%
North America18%27%
Asia-Pacific
37%61%
Europe
37%54%
Middle East
55%71%
Latin America70%79%
Data source: EY (2021).

Generational Shift: Alternative Investment Adoption Trends Among Gen X and Millennials

It’s interesting to note the difference in alternative investment usage among different generations. According to the 2021 EY Global Wealth Research Report, Gen Xers are currently the most likely to have alternative investments in their portfolio.

But, the trend is expected to change in the near future as more and more millennials are expected to jump on the alternative investment bandwagon.

By 2024, it’s predicted that a significant increase in the percentage of millennials who have alternative investments in their portfolio will happen. So, it looks like the future of alternative investments is in good hands.

GENERATIONCURRENT USAGE LEVEL OF ALTERNATIVE INVESTMENTSESTIMATED USAGE LEVEL BY 2024
Millennial32%60%
Generation X38%54%
Baby Boomer26%34%
Data source: EY (2021).

Outperforming the Stock Market: How Alternative Investments Stack Up Against the S&P 500

Now if you´re wondering how alternative investments compare to the stock market, I’ve got some interesting news for you. According to performance data, private equity is the only alternative investment that outperforms the S&P 500.

That’s right, you heard it! And to get an even better understanding of how alternative investments have been doing, we can compare their performance with more traditional options by looking at indices that track major alternative investment classes over the years.

INDEXAVERAGE RETURN 2021AVERAGE RETURN 2017 TO 2021AVERAGE RETURN 2012 TO 2021
S&P 500
28.7%
19.2%
17.1%

Cambridge Associates U.S. Private Equity Index41.3%
23.6%
18.5%

Bloomberg Barclays U.S. Aggregate Bond Index-1.5%
3.6%
3.0%

Cliffwater Direct Lending Index12.8%
8.8%
9.7%

NCREIF Property Index
6.15%
2.4%
2.5%

Barclay Hedge Fund Index10.2%
7.4%
3.6%
Data source: EY (2021).

Luxury Goods Performance: A Decade of Increase

How have luxury goods fare in this category? Well, according to the Knight Frank Luxury Investment Index, the value of luxury goods has increased by a whopping 123% over the last decade.

And, when it comes to specific items, rare whisky is the clear winner with a value increase of 428% over the past 10 years.

However, not all luxury goods performed as well, with furniture and coloured diamonds having more modest increases of 19% and 23%.

Although luxury goods can have the potential for appreciation, they’re not typically a big part of wealthy investors’ portfolios.

This is mainly due to a few reasons:

First, luxury goods are often illiquid, making it difficult and expensive to buy and sell even in small quantities.

Second, there are risks and limited regulation associated with luxury goods – for instance, the issue of counterfeit art is well-known, and sales are not always reported.

Third, there may be a lack of historical data for specific items, and finally, some luxury goods require significant costs for maintenance and upkeep over time.

ITEM12-MONTH CHANGE10-YEAR CHANGE
Knight Frank Luxury Investment Index
9%
123%

Rare whisky
9%
428%

Cars
3%
164%

Wine
16%
137%

Watches
16%
108%

Handbags
7%
78%

Art
13%
75%

Coins
9%
64%

Jewelry
2%
57%

Colored diamonds
2%
23%

Furniture
1%
19%
Data source: Knight Frank (2021).

The Rise of Digital Assets: Cryptocurrencies and NFTs among High-Net-Worth Investors

Despite the recent crash in prices and bankruptcies cryptocurrencies are still popular in 2023. Not only that, but it also helped grow the popularity of more blockchain-based assets, like non-fungible tokens (NFTs).

And did you know that NFTs are used to buy and sell digital art? That’s right, digital art investments are now a thing!

A recent report by Capgemini found that digital assets, including cryptocurrencies and NFTs, are a hit among high-net-worth individuals, who have at least $1 million in assets.

In fact, an impressive 71% of these individuals have invested in digital assets and an even more impressive 91% of high-net-worth individuals under 40 have invested in them too!

So, alternative investments are on the rise, and I’ve got the numbers to prove it.

According to data from Preqin, alternative assets under management are projected to skyrocket to a whopping $17.2 trillion by 2025.

That’s a huge 320% increase from 2010, when alternative assets under management were at $4.1 trillion. Looks like alternative investments are the way to go!

YEARALTERNATIVE ASSETS UNDER MANAGEMENT

2010
$4.1 trillion

2011
$4.6 trillion

2012
$5.6 trillion

2013
$6.4 trillion

2014
$6.9 trillion
2015
$7.3 trillion

2016
$7.8 trillion

2017
$8.8 trillion

2018
$9.5 trillion

2019
$10.8 trillion

2020
$10.7 trillion

2021 (projected)
$11.8 trillion

2022 (projected)
$13.0 trillion

2023 (projected)
$14.2 trillion

2024 (projected)
$15.6 trillion

2025 (projected)
$17.2 trillion
Data source: Preqin (2020)

Institutional Investors Eye Increased Allocation to Alternative Investments by 2025

Have you heard about what institutional investors are planning for their alternative investments?

Well, according to Preqin, a firm that provides data and analytics on alternative investments, an overwhelming 81% of institutional investors surveyed are planning to increase their allocation of funds to alternative investments by 2025.

Only 3% are planning to decrease their allocation. That’s pretty exciting, right? It looks like alternative investments are on the rise!

INSTITUTIONAL INVESTORS’ PLANS FOR ALLOCATIONS TO ALTERNATIVE INVESTMENTS BY 2025PERCENTAGE
Will increase significantly
26%
Will increase
55%
Will stay the same
16%
Will decrease
2%
Will decrease significantly
1%
Data source: Preqin (2020)

Institutional Investors Show Strong Interest in Private Equity: 79% Planning to Increase Allocation by 2025

I found some cool data on institutional investors’ plans for alternative investments.

It looks like private equity is the top dog when it comes to performance, and it seems like a lot of institutional investors are taking notice.

A whopping 79% of them are planning to increase their allocation to private equity by 2025.

That’s a pretty big vote of confidence for this alternative investment!

INSTITUTIONAL INVESTORS’ PLANSPRIVATE EQUITYPRIVATE DEBTHEDGE FUNDSREAL ESTATEINFRASTRUCTURENATURAL RESOURCES

Will increase significantly
23%16%8%10%15%6%

Will increase
56%51%27%41%51%
29%

Will stay the same
17%25%34%33%24%38%

Will decrease
3%6%19%13%6%19%

Will decrease significantly
1%2%13%2%3%
8%
Data source: Preqin 

Conclusion

Well, there you have it!

It’s clear that alternative investments are becoming more and more popular. From the growth in the total amount of alternative assets under management to the increasing number of investors, including high-net-worth individuals and institutional investors, who are looking to invest in alternative assets.

It’s also interesting to see how luxury goods, digital assets, and private equity are particularly popular among alternative investments.

While there are still some concerns with alternative investments, such as their risk and lack of historical data, it’s clear that they are poised for growth in the coming years.

So, whether you’re already invested in alternative assets or just starting to explore your options, it’s worth keeping an eye on this exciting and constantly evolving world of alternative investments.

Some key takeaways:

North America has the lowest usage of alternative investments, most likely due to the strong stock market.

Gen Xers have the highest use of alternative investments, but that’s expected to change as millennials become more interested.

Private equity is the only alternative investment that outperforms the S&P 500.

Luxury goods have seen their value increase significantly over the past decade, but they’re not a common alternative investment due to factors like illiquidity, risk, and lack of historical data.

Digital assets like cryptocurrencies and NFTs are growing in popularity, especially among high-net-worth individuals.

Alternative assets are expected to see significant growth, with a projected $17.2 trillion in assets under management by 2025.

Institutional investors also plan to increase their allocation to alternative investments, with private equity being the top choice.

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