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Alternative investments such as real estate and private credit funds are gaining popularity as asset owners and fund managers seek to diversify portfolios amid concerns about the U.S. and global economic outlook and the uncertain potential for returns in the stock and bond markets.
The S&P 500 Index surged more than 20% in each of the last two years. Meanwhile, bond performance improved and the spread between investment grade corporate bonds and high-yield debt is negligible. Yet the outlook for the economy is cloudy, despite an overall expectation for solid corporate profits. Inflation ticked higher in January, and consumer confidence has fallen in the last two months. Meanwhile, the potential impacts of the administration’s tariff and immigration policies present colossal question marks.
Amid that uncertain future, a desire for stable assets with defined returns is driving expansion into alternative investments. Typically, investors cycle into the bond market when stocks rise dramatically, though that does not always work and can also push investors to consider alternative options.
“In 2022 we got a reality check. You can have stocks and bonds that correlate positively in a downward direction, and that’s a really risky phenomenon for investors to experience,” says Jared Gross, head of institutional and portfolio strategy at J.P. Morgan Asset Management. “Investors are very aware that that remains a possibility [in 2025].”
Alt Challenges
Still, alternative investments present some challenges, too. They are often illiquid and can be complex, says Rich Nuzum, Mercer’s executive director of investments and global chief investment strategist.
Gross highlights real estate as an attractive alternative investment for asset owners looking to rebalance portfolios. Prices have fallen, enabling investors to buy assets at a discount, he notes.
“It certainly has been getting a fresh and much more optimistic look, relative to where it was a year or two ago,” he says.
Gross projects investors buying core assets—office, retail, residential and industrial buildings that are leased and generating income—could expect a compound return of 8.1% this year, more than the returns predicted for U.S. equities or fixed income. Investors willing to take on more risk and buy properties that need renovations or repositioning could see a 10.1% compound return.
Alexandra Wilson-Elizondo, co-head and co-CIO of multi-asset solutions for Goldman Sachs Asset Management, says investing in real estate can be tricky.
“We’ve seen pockets of commercial real estate issues,” said Wilson-Elizondo. “It’s about being more nuanced in the space, but we do think it has a creative value.”
Transportation assets such as cargo ships and infrastructure necessities such as natural gas carriers are also gaining favor among investors because they offer a stable income stream and low volatility. Gross says these assets, along with real estate, represent an opportunity for long-term appreciation and a hedge against inflation.
Private Markets
Gross also suggests that investors consider earmarking some of their assets for private equity funds. That will tie up the funds for seven to 10 years, but Gross says it makes sense for investors because the funds own such a large portion of the economy. He predicts they will have a compound return of 9.9% this year.
Private credit funds are catching investors’ eye because they offer a set return, says Nuzum, adding that problems in loan portfolios could adversely affect the outcome. Still, he says, “you’re starting with a yield that’s observable, and so that that gives a bit more certainty or foundation to the decision to allocate to private credit relative to other classes.”
According to Nuzum, some private credit funds will allow investors to withdraw money over the life of the investment. One downside is that the fund may not be investing the money as aggressively as possible. Another is that any one limited partner in a fund may not have access to their money if others have already received cash.
Wilson-Elizondo is also a fan of private credit, she says, because the funds spread risk over a variety of sectors, which is challenging to do in other loan investments. However, she says their popularity has led to higher prices.
For some investors, cash is king. Nuzum says some of the most sophisticated investors are holding cash plus derivative overlays that give them the same exposure as investing in a market-weighted benchmark index comprised of publicly traded, liquid securities.
This allows them to hold cash for a long period without the opportunity costs, he says.
“The idea is that when they hit a crisis or need liquidity, they actually have the physical cash,” Nuzum says.
Cash is not the only thing being invested: Nuzum says many asset owners are investing time to ensure they have appropriate governance structures that will allow them to move on any opportunities that may arise if there is a financial crisis.
“They’re creating these opportunistic governance arrangements to make sure when we hit a bump, [they’re] actually going to benefit from the bump when other people are panicking and getting out,” Nuzum says.
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Tags: Alexandra Wilson-Elizondo, Alternative Investments, Fixed-Income, Goldman Sachs Asset Management, J.P. Morgan Asset Management, Jared Gross, Mercer, Private Credit, rebalancing investments, Rich Nuzum