UHNW Individuals Use Alternative Investments

August 25, 2021

It’s no secret that the ultra-rich have access to alternative investment opportunities that seem unavailable or unobtainable to the average investor, like expensive wine, vintage cars, fine art, equity in private companies, and real estate.

What may come as a surprise is that ultra-high-net-worth investors (those with a net worth of at least $30 million) have, on average, 50% of their assets in alternative investments. And they are likely to allocate even more of their portfolio toward alternative investments in coming years, despite the recent strong performance of major stock market indices.

Before going further, let’s define “alternative investment.”

Alternative investments are investments in anything other than listed equities, bonds, and currencies. It’s a broad term that encompasses tangible assets, like wine, baseball cards, cars, art; and commodities like precious metals, real estate, private equity, private credit; and investments in hedge funds.

Read on to find out how the ultra-wealthy incorporate alternative investments into their portfolios.

Key findings

  • Ultra-high-net-worth investors (those with a net worth of at least $30 million) had 50% of their assets in alternative investments in 2020, down from 52% in 2017. Investors with over $1 billion in assets have more than 50% of their assets in alternative investments.
  • High-net-worth investors (typically defined as those with over $1 million in assets) shifted their alternative investments toward private equity and real estate between 2017 and 2020.
  • Private equity accounts for 54% of the alternative investments managed by ultra- high-net worth investors. Real estate accounts for 22%, making it the second-largest holding in alternative investment portfolios of the ultra-wealthy.
  • Cryptocurrency, another alternative investment, is held by 72% of high-net-worth investors.
  • Total alternative investment assets under management are projected to reach $17.2 trillion in 2025, more than four times the 2010 level.
  • Certain luxury goods, such as rare whisky, classic cars, wine, and handbags have seen their value grow over 100% over the past 10 years.

Ultra-high-net-worth families had 50% of their assets in alternative investments in 2020

Ultra-high-net-worth families had about 50% of their assets in alternative investments in 2020, down 2% from 2017 but still accountable for a larger portfolio share than any other asset class, according to a survey from the global investing firm KKR.

KKR also reports that families with over $1 billion in assets under management — well above the ultra-high-net-worth cutoff of $30 million — have invested over 50% of their assets in alternative investments.

It’s mostly the ultra-rich that invest in alternative investments.

High-net-worth investors (those with assets over $1 million) allocated 26% of their assets to alternative investments in 2020, up from 22% in 2017.

For comparison, alternative investments make up about 5% of the average investor’s portfolio, per a survey from the Chartered Alternative Investment Analyst Association.

While listed equities have been on a tear with few exceptions over the past decade, ultra-high-net-worth investors allocated just 31% of their portfolios to those equities in 2020. Listed equities accounted for 49% of the portfolio’s of high-net-worth investors.

 

Asset allocation as a percent of total
High-net-worth Ultra-high-net-worth
Assets 2017 2020 Change 2017 2020 Change
Listed equities 43% 49% 6% 29% 31% 2%
Fixed income 33% 22% -11% 9% 10% 1%
Alternatives 22% 26% 4% 52% 50% -2%
Cash 2% 2% 0% 10% 9% -1%

DATA SOURCE: KKR (2021).

The ultra-wealthy’s outsized role in alternative investments is also shown by data on usage of those investments.

81% of ultra-high-net-worth clients surveyed by EY currently hold alternative investments, compared to 55% of very-high-net-worth clients, 29% of high-net-worth clients, and just 14% of those defined as “mass affluent.”

 

Current use of alternative investments, future potential use (including consideration), percentage of clients
Current usage level Estimated usage in 2024
Global 32% 48%
North America 18% 27%
Asia-Pacific 37% 61%
Europe 37% 54%
Middle East 55% 71%
Latin America 70% 79%
Millennial 32% 60%
Generation X 38% 54%
Baby Boomer 26% 34%
Mass affluent 14% 32%
High-net-worth 29% 46%
Very-high-net-worth 55% 68%
Ultra-high-net-worth 81% 85%

DATA SOURCE: EY (2021).

Private equity and real estate were the only alternative investments to see portfolio growth from high-net-worth families between 2017 and 2020

High-net-worth families gave private equity and real estate larger shares of their portfolios in 2020 compared to 2017, with both notching 3% gains. Those are the largest percentage gains among all assets, including traditional investments.

This group allocated 27% of their assets to private equity in 2020. Only listed equities accounted for a larger share of their portfolio. Real estate made up 11% of their assets, the third-largest share.

Hedge funds saw the largest decline in portfolio shares with a 6% reduction to account for just 6% of the portfolios of high-net-worth families in 2020, while private credit and other real assets also experienced shrinking shares.

 

Asset class 2017 2020 Change
Listed equities 29% 31% 2%
Private equity 24% 27% 3%
Real estate 8% 11% 3%
Fixed income 9% 10% 1%
Cash 10% 9% -1%
Hedge funds 12% 6% -6%
Private credit 6% 4% -2%
Other real assets 3% 2% -1%

DATA SOURCE: KKR (2021).

Allocation within alternative investments
Asset class 2017 2020 Change
Private equity 46% 54% 8%
Real estate 15% 22% 7%
Hedge funds 22% 12% -10%
Private credit 11% 8% -3%
Other real assets 6% 4% -2%

DATA SOURCE: KKR (2021).

Private equity investments by high-net-worth investors are projected to continue to grow.

Bite, an alternative investment platform, predicts 9% annual growth in private equity investments from those investors through 2024 due to technological improvements that will increase ease and efficiency of investing in private equity, solid historical returns, and the desire for diversification.

72% of high-net-worth investors have invested in cryptocurrency

72% of high-net-worth investors have invested in cryptocurrencies, an alternative investment that has at times dominated financial headlines with mind boggling gains and drops in recent years, according to Capgemini, a consulting firm that focuses on digitalization and technology.

High-net-worth investors do, however, face some unique challenges that may be keeping them from investing heavily in cryptocurrencies.

Those investors are accustomed to services that navigate them through complex tax and inheritance issues that come with the territory of having millions, if not tens or hundreds of millions, in assets. Major banks, however, are only beginning to offer or explore such cryptocurrency services for their wealthy clients.

Those services are, in all likelihood, a prerequisite to cryptocurrency composing even a relatively small slice of the average high-net-worth investor’s portfolio.

Private equity is the only alternative investment to outperform the S&P 500

Proxies for major alternative investment classes, while imperfect, show that only private equity has outperformed the S&P 500 over the past ten years.

Of course, there are some high-net-worth investors whose investments in private credit, real estate, or hedge funds beat the market.

It’s no surprise that the average portfolio of high-net-worth investors is tilted toward listed equities and private equity, the two top-performing assets.

 

Average return, 2020 Average return, 2018–2020 Average return, 2016–2020 Average return, 2011–2020
S&P 500 18.4% 15.17% 16% 14.49%
Cambridge Associates U.S. Private Equity Index 27.8% 19.3% 17.8% 15.8%
Bloomberg Barclays U.S. Aggregate Bond Index 7.51% 5.41% 3.83% 3.9%
Cliffwater Direct Lending Index 5.45% 7.51% 8.48% 9.4%
NCREIF Property Index 1.6% 1.51% 1.61% 2.2%
Barclay Hedge Fund Index 11.14% 5.52% 6.6% 4.98%

Alternative investment assets under management are projected to reach $17.2 trillion in 2025, over four times the 2010 level

Total alternative assets under management are projected to reach $17.2 trillion by 2025, according to Preqin, a firm that provides data and analytics on alternative investments. That’s about a 320% increase from the $4.1 trillion in alternative assets under management in 2010.

Despite a slight decline in alternative assets under management from 2019 to 2020, annual growth from 2021 to 2025 is projected to exceed all previous years other than 2018.

 

Year Alternative assets under management
2010

$4.1 trillion

2011

$4.6 trillion

2012

$5.6 trillion

2013

$6.4 trillion

2014

$6.9 trillion

2015

$7.3 trillion

2016

$7.8 trillion

2017

$8.8 trillion

2018

$9.5 trillion

2019

$10.8 trillion

2020

$10.7 trillion

2021 (projected)

$11.8 trillion

2022 (projected)

$13.0 trillion

2023 (projected)

$14.2 trillion

2024 (projected)

$15.6 trillion

2025 (projected)

$17.2 trillion

DATA SOURCE: PREQIN (2020).

81% of institutional investors intend to increase the allocation of their funds in alternative investments by 2025

In line with alternative assets under management expected to grow, 81% of institutional investors surveyed by Preqin intend to increase the allocation of their funds to alternative investments by 2025.

Just 3% intend to decrease their allocation to alternative investments in that timeframe.

 

Institutional investors’ plans for allocation to alternative investments by 2025
Will increase significantly 26%
Will increase 55%
Will stay the same 16%
Will decrease 2%
Will decrease significantly 1%

DATA SOURCE: PREQIN (2020).

79% of institutional investors will increase allocations to private equity

79% of institutional investors will increase allocations to private equity by 2025, per Preqin — no surprise given strong returns in recent years.

Two-thirds of institutional investors say they’ll boost funds invested in private debt and infrastructure, while just over half say they’ll do the same for real estate.

 

Institutional investors’ plans for allocation to alternative investments by 2025 by asset
Private Equity Private Debt Hedge Funds Real Estate Infrastructure Natural Resources
Will increase significantly 23% 16% 8% 10% 15% 6%
Will increase 56% 51% 27% 41% 51% 29%
Will stay the same 17% 25% 34% 33% 24% 38%
Will decrease 3% 6% 19% 13% 6% 19%
Will decrease significantly 1% 2% 13% 2% 3% 8%

DATA SOURCE: PREQIN (2020).

The value of rare whisky, classic cars, wine, and handbags are up over 100% over the past 10 years

Luxury goods and other collectibles, despite their flashiness, don’t make up notable slices of the alternative assets portfolios of the wealthy. However, the value of luxury goods has grown by 129% over the past 10 years, as measured by the Knight Frank Luxury Investment Index.

Rare whisky has seen explosive growth in value over that period with a 478% increase. Handbags, wine, and classic cars have also notched increases in value of over 100% over the past ten years.

COVID-19 has thrown a wrench in luxury goods investing. Values of art, rare whisky, diamonds, jewelry, and coins dropped in 2020 as supply chain issues crunched production and delivery and normal methods of sales like auctions and other face-to-face interactions were snarled by the pandemic.

Clearly, some luxury goods have grown significantly in value and can offer many of the same benefits of other alternative investments. So why do they hardly register in the alternative investment portfolios of the wealthy?

There are a few reasons:

  • Luxury goods are illiquid. They can be expensive and time-consuming to buy and sell even in small quantities.
  • They’re risky and relatively unregulated — counterfeit art, for example, is a long-standing problem and sales are not always reported.
  • Historical data for particular items can be lacking.
  • Some luxury goods can require significant costs over time for things like maintenance and upkeep.

 

Item 12-month change 10-year change
Rare whisky -4% 478%
Classic cars 6% 193%
Wine 13% 127%
Handbags 17% 108%
Watches 5% 89%
Coins -1% 72%
Art -11% 71%

Jewelry

-1% 67%
Colored diamonds -1% 39%
Furniture 4% 22%
Knight Frank Luxury Investment Index 3% 129%

DATA SOURCE: KNIGHT FRANK (2021). FURNITURE DATA IS FROM Q2 2020.

Pros and cons of alternative investments

Alternative assets are attractive because they offer diversification, have less correlation to the stock market than traditional investments, and can be a hedge against inflation.

Some invest in alternatives with the hope that they’ll outperform the market, though data compiled above suggests that, on average, most alternative assets don’t generate better returns than the S&P 500.

Alternative investments also come with some unique challenges. They can be risky and lack the regulation and transparency investors are used to when buying and selling listed equities. Certain alternative investments can be relatively illiquid, hard to buy or sell, and expensive to maintain.

And actually making these alternative investments can be more complicated than simply buying equities on an exchange.

From alternative to mainstream

With ultra-high-net-worth investors devoting 50% of their investment portfolios to alternative assets and 81% of institutional investors planning to move more assets into alternative investments, it’s clear that alternative investments are actually mainstream for the wealthy.

What about retail investors who generally don’t have access to major types of alternative investments?

The picture is mixed, but there’s some reason for optimism. 50% of fund managers surveyed by Preqin reported that they don’t offer alternative investments to retail investors and have no plans to do so. On the other hand, 17% of fund managers responded that they don’t currently offer alternative investments to retail investors but plan to do so in the future, and 15% said they do offer access to alternative investments and plan to expand their offerings.

When it comes to luxury goods and collectibles, new funds and platforms are popping up to give the average investor the ability to invest in shares of fine wine, art, cars, and so on.

Real estate investment trusts have become a popular way for everyday investors to tap into the real estate market.

And retail investors already have cryptocurrency — a relatively new alternative investment — on their radar.

For the ultra-wealthy, however, alternative investments aren’t going anywhere.

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