High net worth individuals (HNWIs) are increasingly gravitating towards alternative assets.
This trend is more than a passing phase; it’s a seismic shift driven by a confluence of factors ranging from market volatility to the pursuit of superior returns.
As the global financial environment becomes more complex and uncertain, alternative assets are providing HNWIs with the diversification, resilience, and growth opportunities that traditional investments struggle to match.
Here are six reasons why the affluent are making this strategic pivot.
- Diversification beyond traditional boundaries
The cornerstone of any robust investment strategy is diversification, and alternative assets offer just that—diversification beyond the traditional boundaries of stocks, bonds, and real estate.
HNWIs are recognizing that these conventional assets are often highly correlated and susceptible to the same market risks.
In contrast, alternative assets such as private equity, hedge funds, crypto, commodities, real estate, infrastructure, art, and collectibles provide exposure to a broader array of market dynamics. This enhanced diversification can significantly mitigate portfolio risk, particularly in times of economic turbulence.
- Superior returns and income potential
One of the most compelling reasons HNWIs are drawn to alternative assets is the potential for superior returns. Private equity and venture capital, for instance, have historically outperformed public markets over the long term.
These investments, although often requiring longer holding periods and higher risk tolerance, can yield substantial rewards.
Similarly, hedge funds, through sophisticated strategies like long/short equity, arbitrage, and global macro, can generate impressive returns that are uncorrelated with broader market movements.
Furthermore, alternative assets can offer attractive income streams. Real estate investments, including commercial properties and real estate investment trusts, provide regular rental income alongside capital appreciation.
Infrastructure investments, such as toll roads and renewable energy projects, also offer stable, inflation-protected cash flows.
- Resilience in volatile markets
History teaches us that alternative assets stand out for their resilience. Commodities like gold, silver, and oil have long been regarded as safe havens during market downturns. Their value tends to rise when equity markets falter, providing a crucial hedge against inflation and economic instability.
- Access to exclusive opportunities
HNWIs are also drawn to the exclusivity and prestige associated with alternative investments. Many alternative assets are not readily accessible to the average investor, requiring substantial capital and sophisticated knowledge.
This exclusivity not only provides a sense of distinction but also access to unique opportunities that can significantly enhance wealth. Art and collectibles, such as fine wine, rare coins, and classic cars, have seen a surge in interest, not just as investments but as cultural assets that reflect personal taste and prestige.
- Innovation and the Tech Boom
The rapid advancement of tech and the rise of disruptive innovations, such as AI, biotech and fintech, are also fuelling the shift towards alternative assets.
HNWIs are increasingly investing in tech startups through venture capital funds, seeking to capitalize on groundbreaking developments – or hoping to back the next Nvidia, maybe?
These investments offer the potential for exponential growth, albeit with higher risk, aligning with the adventurous spirit and forward-looking mindset of many affluent investors.
- Regulatory and tax Advantages
Alternative assets often come with distinct regulatory and tax advantages that can be highly beneficial for HNWIs.
Certain jurisdictions offer favourable tax treatments for investments in private equity and hedge funds, as well as for assets held in trust or estate planning vehicles.
These advantages can enhance after-tax returns and provide strategic benefits in wealth management and succession planning.
The migration of high net worth individuals towards alternative assets is a testament to the evolving dynamics of wealth management.
In seeking diversification, superior returns, resilience, exclusive opportunities, and strategic advantages, HNWIs are not just preserving their wealth but actively enhancing it in innovative and sophisticated ways.
As the financial landscape continues to evolve, I believe the allure of alternative assets is set to grow even stronger, cementing their role as a cornerstone of modern investment portfolios.
Nigel Green is deVere CEO and Founder
Also published on Medium.
