The top 5 misconceptions about alternative investments

By Deshawn Peterson

Alternative assets and private markets have gained popularity in recent years as investors seek to diversify their portfolios and access new sources of return.

However, there are several misconceptions surrounding these investments that can lead to confusion and even misinformed decision-making. In this article, we'll explore some of the most common misconceptions about alternative assets and private markets.

Misconception 1: Alternative assets are only for wealthy investors.

One of the most pervasive misconceptions about alternative assets and private markets is that they are only available to wealthy investors. While it's true that many alternative investments require higher minimum investments than traditional investments like stocks and bonds, there are a growing number of options that are accessible to investors of all income levels. For example, crowdfunding platforms have made it easier for individual investors to participate in private equity and real estate deals with much lower minimum investments than traditional private placements.

Misconception 2: Alternative assets are too risky.

Another misconception about alternative assets and private markets is that they are inherently riskier than traditional investments. While it's true that some alternative investments, such as venture capital and distressed debt, carry higher levels of risk than traditional investments, others, such as real estate and infrastructure, can offer lower levels of risk than the public markets. It's important for investors to evaluate the specific risks and potential returns of each investment opportunity and make informed decisions based on their own risk tolerance and investment goals.

Misconception 3: Alternative assets are illiquid.

Many investors believe that alternative assets and private markets are illiquid, meaning that it's difficult or impossible to sell an investment before it reaches maturity. While it's true that some alternative investments, such as private equity and venture capital, typically have longer investment horizons than traditional investments, others, such as real estate investment trusts (REITs) and exchange-traded funds (ETFs), offer greater liquidity. In addition, there are now secondary markets for many types of alternative investments, allowing investors to sell their holdings before maturity if they choose to do so.

Misconception 4: Alternative assets are hard to value.

Another common misconception about alternative assets and private markets is that they are difficult to value. While it's true that some alternative investments, such as private equity and venture capital, may not have a readily available market price, there are established methods for valuing these assets based on factors such as the performance of the underlying business or the value of the underlying assets. In addition, many alternative investments, such as real estate and infrastructure, have established markets and can be valued using traditional methods such as appraisals and market comparable.

Misconception 5: Alternative assets don't perform as well as traditional investments.

Finally, some investors believe that alternative assets and private markets don't perform as well as traditional investments like stocks and bonds. While it's true that the performance of alternative investments can vary widely depending on the specific investment and market conditions, studies have shown that over the long term, alternative investments can offer attractive returns and diversification benefits. For example, a study by the Wharton School of the University of Pennsylvania found that private equity investments outperformed the public markets by an average of 3.5% per year over a 25-year period.

In conclusion, alternative assets and private markets offer investors a wide range of investment opportunities and potential benefits, including diversification, potential for higher returns, and access to specialized expertise. However, there are several misconceptions about these investments that can lead to confusion and misinformed decision-making. By understanding the specific risks and potential returns of each investment opportunity, investors can make informed decisions about whether alternative assets and private markets are a good fit for their portfolios.

About the Author
Deshawn Peterson joined FPA in 2022 and is a part of the NexGen national leadership PR committee.
Deshawn’s professional life has taken him around the world, gaining a global perspective on capital markets and client needs. In his most recent role, he was based in Shanghai, China where he was a wealth manager advising global high-net-worth individuals across eastern Asia.
Deshawn lives in Philadelphia, is a fitness enthusiast and speaks Mandarin. He enjoys outdoor activities and participating in distance obstacle course races, such as Spartan Races. Deshawn appreciates reading and maintains a personal goal of reading one book a month. He is a native of Detroit and received his bachelor’s degree from Western Michigan University.