Alternative Investments and Their Roles in Multi-Asset Class Portfolios

Stephen Beck, Tina Gosalia, Darby Nielson, and Sumit Sharma
Fidelity Investments

This paper by Fidelity Investments provides an in-depth look at alternative investments (e.g., private equity, private credit, hedge fund strategies, real assets, and digital assets), which many investors allocate to when seeking to enhance their returns, manage risk, and/or improve the diversification of their portfolios. Using Burgiss Data, the authors studied the historical investment characteristics of 16 traditional and alternative investment categories from 2005 through 2021 and ranked them based on three key metrics: (1) annualized returns, (2) performance amid poor public equity market returns, and (3) diversification benefits.

The authors’ findings show that during this period:

• Private equity, private credit, and private real estate demonstrated higher returns than most other asset categories.

• The returns of private equity, direct lending, private real estate, and hedge fund strategies held up relatively well amid poor public equity performance.

• Hedge fund strategies, private real estate, and late-stage venture capital offered enhanced portfolio diversification.

The authors conclude that in a multi-asset class context, investors who choose to include alternative investments in their allocations may enhance their risk-adjusted returns in comparison to those who only invest in traditional asset classes.