Research has shown that high-net-worth investors (HNWIs) are increasing their allocation to alternative investments, such as private equity, hedge funds, and real estate. A desire for diversification and the potential for higher returns than traditional investments, such as stocks and bonds, drives this trend.

High-net-worth investors are increasingly allocating a portion of their portfolio to alternative investments, according to a recently published research report, The Cerulli Report—U.S. High-Net-Worth and Ultra-High-Net-Worth Markets 2022: Shifts in Alternative Allocations. (https://www.cerulli.com/reports/us-high-net-worth-and-ultra-high-net-worth-markets-2022)

The report, published by Cerulli Associates, a research, consulting, and analytics firm focused on the financial services industry, states that the average allocation of high-net-worth clientele’s assets to alternative investment options rose to 9.1% in 2021, up from 7.7% in 2020.

The report cites a variety of reasons for the increase in alternative investments among high-net-worth investors, including portfolio diversification to help reduce volatility and new growth opportunities. Diversification is seen as a way to reduce portfolio volatility, and the new growth opportunities are seen as attractive to clients looking for ways to enhance their returns. As a result, financial advisors are increasingly adding alternative investments to client allocations for various reasons, with portfolio diversification and new growth opportunities being the top cited.

                                             Related: Non-Traded Alternatives Record High of $104 Billion Raised in 2022

“Advisors, disappointed in public equity and fixed-income returns, are allocating more to private capital exposures,” says Chayce Horton, research analyst. “By expanding opportunities into private asset and credit markets, affluent and high-net-worth investors are better equipped to diversify their portfolios properly.”

Alternative investments include private equity, hedge funds, and real estate. These investments are generally considered riskier and more illiquid than traditional investments, such as stocks and bonds. Therefore, it is important for investors to carefully consider their risk tolerance and investment goals before allocating a significant portion of their portfolio to alternatives.

According to the report, high-net-worth practices plan to increase their allocation to alternative investments in almost all strategies over the next two years. Private equity is at the forefront of this trend, with 50% of advisors and executives planning to increase their allocations, followed by private real estate at 45% and direct investments and co-investing at 32%.

The majority of surveyed high-net-worth practices, more than 94%, expect to either maintain or increase their positions in all types of alternative investment opportunities, except for hedge funds.

The trend of high-net-worth practices offering alternative manager search and selection as a primary service is on the rise, increasing from 50% in 2016 to 67% in 2022, and is expected to continue as private markets mature and more opportunities arise in the space. Cerulli believes that this trend will persist among high-net-worth practices.