The Institutional Rebalance: Private Alternative Investment Allocations

Over the last 20 years, both institutional and retail investors have increasingly been looking to alternative investments to fill the gaps in their traditional equity and fixed income portfolios.² For the price of illiquidity and lock-ups, private alternative investments can offer differentiated diversification, higher-yields, and inflation hedging real assets. Many private alternative investments have outperformed their equity and fixed income peers, and as such they have become an outsized portion of investor portfolios due to the denominator effect. Exits have recently been harder to come by in a tighter monetary environment, and investors have been bearing the costs of illiquidity even with strong performance. To address this illiquidity and the denominator effect, secondary markets have been rapidly growing in volume which gives investors more options to trim positions and rebalance their portfolios. With inflationary pressures and tight monetary policy lingering, both retail and institutional investors will increasingly allocate to alternative investments and fuel their growing secondary markets.

The Growth of Alternative Investments

Source: CAIS Group. July 2025. “What are Alternative Assets”

Investor interest in alternative investments has been growing due to the benefits that the asset class can provide. First, during periods of stimulative low interest rates, investors have been forced to look past traditional bonds for income. Where there is a need, Wall Street will deliver, and groups like Blackstone met this demand during a low-interest rate environment in 2021 by shifting a large amount of its investments to real estate, infrastructure, and private credit markets.³ With their efforts, Blackstone raised over $20 billion for its new real estate fund alone to take advantage of the low rates and offer investors the larger yields they were looking for.

Investors have also been looking beyond traditional stocks and bonds for inflation protection. The downsides of the 60/40 portfolio are fresh in investors minds after 2022 when stocks and bonds cratered simultaneously due to inflation. With inflation fears hanging around due to tariffs, investors have been looking to alternative real estate, infrastructure, and commodities funds for inflation protected returns.

The 2022 Market Turmoil

Source: CAIS Group. July 2025. “What are Alternative Assets”

The diversification and downside protection gaps in a traditional 60/40 portfolio were exposed by inflation in 2022, and now investors are increasingly looking to alternative investments for added diversification. Macro strategies, private real estate, and private credit all drive returns with a low correlation to traditional 60/40 portfolios, giving investors a critical tool in managing risk and delivering returns.

Correlation of 17 asset classes with each other, 2005-2023

Source: Fidelity. September 2024. “Why you might consider alternatives”

The costs that investors pay for private, alternative investments are illiquidity and lock-up periods. Investors think of illiquidity and lock-up periods when investments take a turn for the worst and cannot be sold. However, with recent strong performance among many alternative investment funds such as private-equity and venture-capital options, investors have been dealing with portfolio outperformers becoming an outsized portion of their portfolios without being able to sell or trim their positions. This is called the denominator effect and represents the costs of illiquidity when alternative investments deliver returns to the upside or otherwise outperform stocks and bonds. Due to the denominator effect, investors are demanding exit options, and Wall Street is once again delivering.

The secondary markets for private alternative investments have been booming as funds struggle to secure exits within a macro environment market by tight monetary policy. With higher interest rates, exits and IPOs have been down, but investors have still been demanding exits.⁴ Many pensions, sovereign wealth funds and endowments have been pressing managers to deliver cash returns on their investments. On the other hand, fund managers want more time and flexibility to deliver the value that has been built on their balance sheet within a strong exit environment. Managers have been looking to Wall Street to bridge the gap through secondary markets which have been exploding in popularity, as global deal volume is set to exceed $200 billion in 2025, up from the previous record of $162 billion in 2024.⁵ With their parabolic rise, secondary markets will continue to grow in volume and become more efficient, lessening the illiquidity and lock-up costs of private alternative investments.

Source: The Wall Street Journal. July 2025. “Private-Equity Secondary Market Defies First-Half Gloom”

Alternative investments have rapidly grown over the last 20 years due to the niche, differentiated return profiles they can generate. Their growth signals a shift in the way that managers look at portfolio risk and returns. With 2022 fresh on investor minds, retail and institutional managers will continue to look to alternative investments to fill the gaps of the traditional 60/40 portfolio and provide added diversification and inflation protection. To achieve those benefits, managers will need to be willing to pay the price of illiquidity and lock-up periods that private alternative investments usually come with. Due to those costs, investors have not been able to exit many private alternative investments within the tight monetary environment of the economy. While investors can be stuck with poor performing assets, in many cases, investors are stuck in assets that are greatly outperforming their portfolio and becoming an outsized portion of their portfolio risk, which is called the denominator effect. As the demand for investor exits has risen, Wall Street has been seizing the opportunity and building a robust secondary private alternative investment marketplace. With secondary deal volume hitting record highs and efficiency increasing, the illiquidity and lock-up costs of private alternative investments will continue to lessen. Alternative investments will continue growing and becoming a pivotal part of investor portfolios as return profiles fill the gaps of traditional 60/40 portfolios and strong secondary markets lessen their costs.

Sources:

1. CAIS Group. July 2025. “What are Alternative Assets”
2. CAIS Group. July 2025. “What are Alternative Assets”
3. Vica Partners. January 2025. “Wall Street’s Growing Appetite for Alternatives: A Generational Shift in Asset Management?”
4. The Wall Street Journal. July 2025. “Private-Equity Secondary Market Defies First-Half Gloom”
5. The Wall Street Journal. July 2025. “Private-Equity Secondary Market Defies First-Half Gloom”