Alternatives: The next frontier for resilient portfolios

Markets no longer move in steady, predictable cycles. Volatility has become a fundamental part of the investment landscape, not a temporary phase. For investors, this requires reconsidering the asset mix in their portfolios – and looking beyond equities and bonds to discover new sources of growth and stability.

That’s where alternative investments come in. Properly chosen and executed, they can enhance resilience, smooth returns and open doors to opportunities that traditional markets can’t reach.

What are alternative investments?

Alternatives are investments outside the traditional universe of listed equities, bonds and cash. They fall into two broad categories: alternative assets and alternative structures.

Alternative assets differ from conventional holdings and often employ unconventional strategies such as leverage – using borrowed money to amplify potential returns – or short selling, which seeks to profit from falling asset prices. They are typically less liquid and have a lower correlation with public markets. Examples include:

• Hedge funds – pooled vehicles using diverse strategies to deliver returns in varied market conditions.
• Tangible assets – infrastructure such as toll roads, power utilities and renewable energy projects, as well as residential, commercial and industrial property.
• Collectables – vintage wine, fine art, rare watches or classic cars. Tangible and often passion-driven, they tend to perform independently of financial markets but require specialist knowledge and patience.
• Digital assets – blockchain-based tokens such as bitcoin and Ethereum, which remain highly speculative and volatile despite growing adoption.

Alternative structures are investment vehicles – often with multi-year lock-ups – that can hold both traditional and non-traditional assets. These include multi-strategy funds, private real estate funds and illiquid strategies such as:

• Private equity and venture capital – unlisted companies, with private equity focused on mature businesses and venture capital targeting early-stage, often tech or biotech, start-ups.
• Private credit – non-bank loans to companies, typically offering higher yields and more complex structures than traditional bonds.

Key trends

Historically, alternatives have been the preserve of institutions and ultra-high-net-worth investors, requiring longer time horizons, lower liquidity tolerance, and specialised expertise. Today, improved access and more flexible structures are drawing in a broader base of sophisticated individual investors. Several forces are driving the shift:

• Persistently low real yields in traditional fixed income.
• Rising institutional allocations from pension funds and endowments.
• Banks are retreating from segments of corporate lending, opening the door for private credit managers with more flexible capital.
• Innovation in vehicles such as interval funds and semi-liquid structures improves accessibility.

Companies are staying private for longer amid heavier regulation and costs in public markets, reducing the pool of listed opportunities.

The role of alternatives

Alternatives can strengthen portfolios by providing returns uncorrelated with listed equities and bonds. By behaving differently across cycles, they can smooth performance and improve risk-adjusted returns.

Private equity offers exposure to sectors absent from public markets. Real assets can help protect against inflation. Hedge funds can deliver returns in a range of conditions, while private credit provides yield potential with lower volatility than traditional high-yield bonds.

Beyond portfolio benefits, alternatives can direct capital towards innovation, infrastructure, and entrepreneurship – from biotech breakthroughs to public-private infrastructure projects. In South Africa, a more dynamic private investment ecosystem could unlock funding for local entrepreneurs and foster growth beyond the JSE.

Benefits and trade-offs

Alternatives come with constraints: limited liquidity, long lock-ups, complex structures, and less transparent valuations. They can also carry higher layered fees and intricate regulatory and tax considerations.

They are not a replacement for traditional investments, but a complement. In the right proportion, they can help reduce volatility, smooth returns and access opportunities unavailable through conventional routes.

Alternatives require patience, diligence and a clear understanding of the risks. They are not suitable for every investor and should not be pursued without professional advice – but for those with the resources and resilience, they could be the difference between merely enduring the next market storm and emerging stronger.

Reginald Labuschagne is the head of product and strategy at Sanlam Private Wealth.

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