Wall Street’s giants are rewriting the playbook on investment portfolios by opening the doors to alternative assets for everyday investors. Once the exclusive playground of the ultra-wealthy, hedge funds, and pension funds, alternatives like private equity, private credit, real estate, infrastructure, and even cryptocurrencies are now stepping into the spotlight for individual investors. This shift, led by titans such as BlackRock and Goldman Sachs, signals a seismic change in how wealth is built and managed—but it’s not without its complexities and risks.
The Alternative Asset Revolution: Why Now?
Jon Diorio, BlackRock’s head of alternatives for wealth, aptly describes this shift: “The alternative market is becoming less alternative.” Public markets are shrinking, and investors are hungry for fresh avenues to grow their wealth. The regulatory landscape is also evolving; for instance, a recent executive order under the Trump administration paved the way for alternative assets in 401(k) plans, a move that stirred controversy but undeniably expanded access.
This democratization of Wall Street is more than just a buzzword. It’s a strategic response to the limitations of traditional portfolios, typically split 60% stocks and 40% bonds. Alternatives offer a chance to enhance diversification and potentially amplify returns over the long haul. But here’s the catch: these assets are often illiquid, harder to value, and come with a complexity that demands investor education and sophistication.
The Risk-Reward Tightrope
Goldman Sachs’ Marc Nachmann highlights a critical nuance: investors get paid for illiquidity. This means locking up funds for extended periods—perfect for retirement savers with long horizons, but potentially perilous for those needing quick access to cash. This is why Goldman’s recent launch of a private credit product tailored for 401(k) plans is a game-changer. Structured as a collective investment trust (CIT), it blends private investments like North American and European direct lending into retirement portfolios, starting with target date funds.
This move is not just about product innovation; it’s a strategic revenue play. Goldman’s asset and wealth management division, already a significant revenue driver, stands to benefit from the recurring fees associated with managing these alternative assets—estimated around 1%. This stable income stream contrasts with the volatility of investment banking revenues tied to IPOs and M&A deals, offering a more predictable growth engine.
BlackRock’s Strategic Edge
While Goldman leverages its broad financial services platform, BlackRock’s pure asset management focus allows it to innovate differently. BlackRock’s integration of private credit and private equity into model portfolios simplifies access for advisors and investors alike. Instead of chasing yield blindly—like buying a private credit fund solely for its 10% yield—investors can now think in terms of portfolio construction and risk-adjusted returns.
BlackRock reports that private assets constitute about 15% of investments in these custom portfolios, a figure poised to grow. This strategic integration reduces the “cumbersome” nature of alternative investing, making it more accessible without sacrificing sophistication.
Lessons from the Past: The Importance of Education
The journey into alternatives hasn’t been without bumps. Blackstone’s 2017 real estate fund, initially a star performer during low interest rates, faced significant challenges when rates surged in 2022. Investors, spooked by falling real estate values and liquidity constraints, rushed for the exits, forcing withdrawal limits. Similarly, Yieldstreet’s recent struggles with real estate funds underscore the inherent risks and the need for investor awareness.
Sam Stovall, CFRA Research’s chief investment strategist, emphasizes the importance of understanding these risks. Alternatives are often not marked to market daily, meaning investors may not see real-time valuations, which can mask volatility until it becomes acute.
What This Means for Investors and Advisors
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Long-Term Horizons Are Key: Alternatives suit investors who can tolerate illiquidity and have a multi-year to multi-decade investment horizon—think young professionals building retirement savings.
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Diversify Thoughtfully: Alternatives should complement, not replace, traditional assets. They can enhance portfolio diversification but require careful allocation to manage risk.
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Demand Transparency and Education: Investors must understand the underlying assets, fee structures, and liquidity constraints. Advisors play a crucial role in guiding clients through these complexities.
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Leverage New Tools: Products like Goldman’s private credit CITs and BlackRock’s integrated model portfolios make alternatives more accessible and manageable. Advisors should explore these offerings to deliver sophisticated solutions efficiently.
Looking Ahead: The Next Decade of Alternatives
According to industry analysts like Bill Katz of TD Cowen, the growth potential in alternatives is massive. With trillions already in defined contribution plans and increasing investor appetite, assets under management in alternatives could skyrocket in the next ten years. This trend will likely reshape the wealth management landscape, making alternative assets a staple rather than a niche.
A Unique Insight: Consider the environmental, social, and governance (ESG) dimension within alternatives. As ESG investing gains momentum, expect more private equity and infrastructure funds to incorporate sustainability criteria, offering investors not only potential returns but also alignment with their values. Advisors should prepare to integrate ESG-focused alternatives, tapping into a growing segment of conscientious investors.
Final Takeaway
The alternative asset wave is here to stay, transforming how individual investors build wealth. But it demands a new mindset—one that balances opportunity with risk, embraces longer horizons, and prioritizes education. For advisors and investors ready to navigate this evolving terrain, the rewards could be substantial. For those who don’t, the risk of being left behind in an increasingly complex market grows.
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Sources:
- CNBC interviews with BlackRock’s Jon Diorio and Goldman Sachs’ Marc Nachmann
- CFRA Research commentary by Sam Stovall
- TD Cowen analysis by Bill Katz
- Blackstone and Yieldstreet fund performance reports
If you’re an advisor or investor, now is the time to reassess your portfolio construction strategies. Explore alternative asset allocations within your retirement and wealth management plans, and ensure your clients understand both the potential and the pitfalls. The future belongs to those who embrace innovation with prudence.
Source: How BlackRock and Goldman Sachs are bringing Wall Street’s hottest asset class to 401(k)s