Alternative Assets and High-Net-Worth Investors

Published on February 2, 2023

Anyone who is financially savvy with alternative assets, wants to diversify their retirement portfolio, or create a hedge against market volatility can include those types of investments within a self-directed retirement plan. This strategy seems to appeal strongly to high-net-worth (HNW) and ultra-HNW individuals.

According to the Motley Fool, this may be because alternative investments are often less volatile than stocks and bonds and can offer a higher rate of return. These factors can reduce risk and enhance the investor’s ability to build more retirement wealth (through the nontraditional investments they already know and understand). Quoting an investment firm study that surveyed the super-rich, The “Fool” also stated that in 2020:

• Among ultra-high-net-worth individuals (commonly defined as people with at least $30 million in investable assets), 81% invested in alternative assets
• Alternative investments comprised 50% of this group’s assets (as opposed to only 5% among average investors)
• Millionaires (net worth of at least $1M) allocated 26% of their assets to alternative investments that year
• Equities are popular among this group, with 31% in listed equities and 27% in private equity investments

Why the wealthy are attracted to alternative assets

As noted in an article in Financial Planning, it’s possible that HNW individuals are attracted to (or don’t shy away from) investments such as real estate, precious metals, private equity, hedge funds, secured and unsecured loans, and other alternative assets because they understand these are more long-term investments.

These assets are also not correlated with the stock market. Investing in a real estate partnership is likely to return a much higher return than traditional stocks. The article cites a report by Cerulli Associates whose research found that investors with a net worth of at least $5 million now have 9.1% of their assets in alternatives to stocks and bonds, up from 7.7% in 2021. Cerulli Associates projects this figure to increase to 9.6% in the next year.

Anyone with heavy investments in stocks and bonds in 2022 has felt the pain of sharply declining portfolio values. With that in mind, it isn’t surprising that about half of the respondents in the Cerulli Associates study said they are attracted to alternative assets to diversify their portfolios and another 50% look for growth opportunities that these asset classes can deliver.

The Cerulli Associates survey cites private real estate investments as popular among financial advisors who work with HNW clients; and another report quoted in the article (by Robert A. Stranger & Co.) found that $33M was raised in 2022 for private REITs—where investors can put money into office buildings, multifamily properties, and other income-generating real estate assets. Cerulli’s results also support private equity funds as appealing to the wealthy, with 45% of respondents saying, “they would be directing more money to private equity in the next two years.”

Private credit—a scenario in which multiple investors pool their money into loans to privately held companies—is another way many of the ultra-wealthy are investing in alternative assets according to the survey.

Younger HNW investors also seek out alternative investments

Disappointing stock market performance is a big reason why younger HNW investors are turning to alternative investments, as reported by CNBC. The media outlet stated that 80% of investors ages 21-42 are invested in alternative assets because most of them don’t expect “above-average returns” from traditional stocks and bonds. CNBC went on to say that these younger investors allocate three times more to nontraditional investments than other generations, and only half as much of their portfolios in stocks than their parents or grandparents held.

Including alternative assets in a self-directed IRA

High-net-worth investors aren’t the only ones who can include alternative assets in their retirement portfolios. Anyone who self-directs their retirement investments can include a broad array of alternative assets within their self-directed IRA (Traditional or Roth), other self-directed retirement plan (SIMPLE IRA, SEP IRA, Solo 401k), an education savings account, or health savings account.

You can learn more about the many options and benefits of self-directed IRAs by registering for a complimentary educational session at Next Generation with a knowledgeable representative. Alternatively, you may contact our helpful team by phone at 888.857.8058 or by email at NewAccounts@NextGenerationTrust.com.