The Reason Why More Plan Administrators Are Turning to Alternative Investments and What It Means for You

Posted on by Wisdom Madu 12 minutes read

The Reason Why More Plan Administrators Are Turning to Alternative Investments and What It Means for You

The Reason Why More Plan Administrators Are Turning to Alternative Investments and What It Means for You

Alternative investments have evolved into an essential part of a portfolio for many, with their market size projected to roughly double from $18.9 trillion in 2024 to $37.8 trillion by 2032.

Key Takeaways

  • According to a BlackRock survey, almost one in four retirement plans may include alternative assets in the upcoming year, making them more popular than before.
  • Private credit, real estate, infrastructure, and private equity all have distinct functions, such as growth, inflation protection, and stable income.
  • The market for alternative investments is expected to nearly double from $18.9 trillion in 2024 to $37.8 trillion by 2032, making them a crucial component of many people’s portfolios.
  • While commodities have a low correlation with traditional markets, making them useful diversifiers despite modest long-term returns, hedge funds generally perform better during market downturns.
  • Retail investors now have unprecedented access to alternatives, including exchange-traded funds (ETFs), real estate investment trusts (REITs), business development companies (BDCs), and new hybrid products with lower minimums, in addition to possible changes to their retirement plans.

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Investments that were previously exclusive to Wall Street and the wealthy are becoming more and more popular in retirement plans. Nearly one in four plan administrators are thinking about adding alternative assets, such as private equity and private credit, within the next year, according to a recent BlackRock survey, with target-date funds being the most likely to do so.

The Reason Why More Plan Administrators Are Turning to Alternative Investments and What It Means for You
The Reason Why More Plan Administrators Are Turning to Alternative Investments and What It Means for You

The slowing of return expectations for conventional stocks and bonds and a growing belief that alternatives, which include everything from private credit to real estate, can provide diversification in erratic markets are the two main causes of this change.

For retirement savers, this shift could have major implications. Alternatives are no longer just a niche play for endowments or hedge funds but increasingly part of the mainstream menu of investment options. But what exactly are alternative investments, and why are they in such demand?

Similar Investments and Diversification

The performance of large-cap equities had been remarkably strong until the mid-2020s, with average annual returns for the S&P 500 of 14.5%, 10.2%, and 8.1% over five, 10, and 20 years, respectively (as of May 2025). However, Goldman Sachs (GS) analysts were not alone in late 2024 when they predicted far more modest gains for the S&P 500 ahead.

They estimated 3% annually over the next decade—and that was before the economic slowdown and market turmoil of early 2025. This gives investors a second major reason to seek out alternatives.

 

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Tips

An estimated 25% of the assets of institutional investors, 20% of those of high-net-worth individuals (HNWI), and 10% of those of retail investors are allocated to alternative investments.

Who Can Invest in Alternatives

Large institutions and accredited investors were largely the only ones with access to alternatives until recently. Now that sponsored retirement plans—the ones you receive through your employer—are beginning to incorporate them, more opportunities are becoming available for regular savers.

Additionally, it has become much simpler for retail investors to obtain access through the channels listed in the table below, even though accredited investors—those who satisfy specific requirements regarding income, net worth, and investing experience—still have the greatest variety of options:

The Performance of the Major Alternative Investments

The most likely candidates for sponsored retirement plans, according to industry analysts, are private credit, real estate, and infrastructure funds since they can be bundled into diversified vehicles like target-date funds and offer inflation or income protection.  Here is how the most popular alternative asset classes have fared under various market conditions for plan administrators considering these options as well as savers who may soon see them appear in their 401(k) target-date funds or are interested in them for separate retirement accounts.

1. Private Equity

Among alternative asset classes, private equity (PE) has historically produced some of the highest returns. These investments typically show a clear “J-curve” pattern in their performance, with early years showing negative returns followed by stronger returns as the investments mature. PE usually experiences large drawdowns during recessions, but historically, they recover more quickly and their dips are not as severe as those of the major stock indexes.

A comparison of public and private equity is shown below. We’ve chosen a more conservative estimate of PE returns because definitions and data for these investments vary greatly, but most show a 3%–5% “illiquidity premium” (the additional bump over similar highly liquid public market investments for the far longer periods PE investments require your money to stay put).

Investors can access the returns for private equity firms through the public markets, though they have performed less well, at least as measured by the S&P 500 Private Equity Index.

2. Real Estate and REITs

Over the past ten years, core real estate has produced annualised returns of roughly 7% with much lower volatility than public REITs. Naturally, after accounting for inflation, we determine that real estate has increased as follows (all data, unless otherwise indicated, are up to and as of the beginning of 2025 for comparison purposes, using data from the U.S. Federal Reserve of St. Louis, Trading View, NAREIT, and other sources we cite, as well as the U.S. Bureau of Labour Statistics’ consumer price index for inflation):

  • CAGR since the 2011 housing market bottom:
  • 3% CAGR since the Great Recession ended:
  • 9% CAGR since the brief pandemic recession ended: 4.0%

As the aforementioned indicates, real estate frequently suffers during recessions, but it generally adapts well to inflation. For example, between the recessions that opened and closed the 1970s, a period of stagflation, we calculate a 3.2% CAGR (adjusted for inflation).

Real estate investment trusts (REITs) and exchange-traded funds (ETFs) with comparable holdings are available for simpler access to the real estate market. Across all property sectors, these companies own, manage, or finance income-producing real estate. They must pay dividends to shareholders equal to at least 90% of their taxable income.

In the past, the contributions of price appreciation and REIT income to their returns have been roughly equal.

Most importantly here, REITs greatly outperform direct real estate purchases, but their volatility is not for the faint of heart: In 2008, REIT indexes dropped 35% to 40% (compared with about 20% for residential and commercial real estate). In 2022, the FTSE Nareit All Equity REITs Index returned 24.9%, while both commercial and residential real estate were up.

3. Hedge Funds

The performance of hedge funds varies depending on the strategies employed. For the HFRI 500 Fund Weighted Composite Index, a global, equal-weighted benchmark that monitors the performance of 500 hedge funds across all strategies and regions, we compute, using data from Hedge Fund Research Inc., a compound annual growth rate (CAGR) of 3.71% from 2005 to the start of 2025. We get an annualised return of 3.32% for the same period for the HFRI Fund of Funds Index, which follows large hedge funds that invest in other hedge funds.

There are exchange-traded funds (ETFs) that try to replicate the performance of hedge funds, such as the ProShares Hedge Replication ETF (HDG), if you want to access the returns of hedge funds through your standard broking account.

4. Private Credit

Over the past ten years, private credit—also referred to as private debt—has expanded significantly as an asset class, filling the void left by banks that cut back on lending after the 2008 financial crisis. Nevertheless, it still only makes up 1.5% of the total due to the size of the global debt market.

Private credit funds have continuously produced annualised returns in the high single digits to low double digits over the previous 20 years. Due to a number of structural advantages, the performance of private credit has frequently been much less volatile than that of public high-yield bonds. In situations where interest rates are rising, like in 2022 and 2023, when private credit greatly outperformed fixed-rate public bonds, loans are usually floating-rate. During this period, private credit funds delivered returns of 6% to 12%, while public high-yield bonds produced negative returns.

Interval Funds, Tender Offer Funds, and BDCs

For retail investors looking to tap into the attractive yields of private credit without the high minimums of traditional private funds, interval and tender offer funds have emerged as popular access points through financial advisors, wealth managers, or, increasingly, brokerage platforms like Schwab and Fidelity.

While tender offer funds allow you to cash out whenever the fund managers choose to offer buybacks (there is no set schedule), interval funds are closed-end funds that allow you to cash out at set, pre-scheduled times (such as every three, six, or twelve months).

BDCs are included in this mix because they mainly invest in middle-market companies’ debt, which is usually below investment grade and unserved by traditional banks. These debts are frequently senior secured loans. Well-managed BDCs have produced returns comparable to those of private debt funds, according to historical data, and their performance closely mirrors trends in private credit. BDCs are required to pay out at least 90% of their taxable income as dividends, which typically results in yields between 8% and 15%. Ares Capital (ARC), the largest BDC with a $15 billion market cap, had a 9.5% yield as of May 2025.

5. Cryptocurrencies

Since they first became widely known in the mid-2010s, cryptocurrencies have experienced extreme volatility. Between the approval of bitcoin futures ETFs in December 2017 and the start of 2025, the largest cryptocurrency, Bitcoin, had a compound annual growth rate (CAGR) of 31.3%; since 2020, it has had a CAGR of 67.3%. However, there have been times when the value of bitcoin and other cryptocurrencies has dropped significantly, as evidenced by the 65.1% decline in 2022.

Furthermore, our analysis of TradingView data reveals that, in contrast to the popular belief that cryptocurrency would do well as a safe haven in the event of issues with stocks or the US dollar, on days of significant market losses, like in April 2025, crypto has also significantly declined.

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6. Commodities

Historically, commodities have produced modest long-term returns of 3% to 5% per year; however, this volatility increases dramatically when oil prices are taken into account. The S&P 500 and commodities have a weak positive correlation of roughly 0.40 (see chart on this page). This relationship varies greatly, though, with energy prices frequently falling during recessions as demand slows.

Since the gold standard ended in 1971, gold has produced yearly returns of roughly 8.3%, maintaining its status as a store of value for millennia.

7. Collectibles

Although they have produced competitive returns, collectibles—such as fine art, rare wines, vintage automobiles, and timepieces—have substantial idiosyncratic risk and liquidity problems. Some collectibles, especially those with scarcity value like rare coins and blue-chip art, have generally kept their purchasing power during inflationary times. High transaction costs (often up to 25%), genuine challenges obtaining accurate valuations, and difficulties selling them during market stress are the main disadvantages.

Someone has filled their home with “one-day-they’ll-be-valuable” trinkets in almost every neighbourhood, but let’s focus on the segment of the market where more accurate data is available:

  • Fine art: The Sotheby’s Mei Moses Art Index indicates that fine art has returned about 8.5% annually from 1950 to the early 2020s, although with extended periods of negative returns.
  • Fine wine: Rare wine, tracked by the Liv-Ex Fine Wine 1000, has returned 8%-10% annually since the index began, but with lower volatility than art.24
  • Gems, watches, and rare coins: We can use import prices collected by the U.S. Bureau of Labor Statistics (BLS) as a proxy for these and other collectibles with an international market (see chart below). Between 2000 and the beginning of 2025, the BLS’s index had a CAGR of about 4.4%.

Conclusion

With nearly a quarter of retirement plans preparing to add alternatives, what was once a niche investment type is moving into the mainstream of retirement saving. That gives you new ways to diversify—whether through private equity, real estate, or private credit—but also new risks to weigh as complex assets enter everyday portfolios and your retirement plan.

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Wisdom Madu

Wisdom Madu is a personal finance and financial education writer at NumericNature, a platform dedicated to helping readers understand money management, saving, investing, insurance, and wealth-building strategies. Through NumericNature, Wisdom Madu explores practical ways individuals can make informed financial decisions, develop healthier money habits, understand investment opportunities, and prepare for long-term financial goals. His work focuses on breaking down complex financial topics into clear explanations, practical examples, and actionable steps that readers can use to improve their financial knowledge. He is particularly interested in the intersection of personal finance, investment education, financial technology, and artificial intelligence, including how emerging tools can help people understand financial information and make more informed decisions. Wisdom Madu believes that financial education should be accessible to everyone, regardless of income level or investing experience. His goal is to help readers ask better questions, evaluate financial risks, compare available options, and approach wealth building with greater knowledge and discipline. At NumericNature, the emphasis is on education, transparency, risk awareness, and practical financial decision-making—not unrealistic promises of quick wealth.