Ever wonder how the most sophisticated consultants and highest-rated portfolio managers allocate investments for their large, institutional clients? Although it might not surprise you to learn that they do things a little differently than your average retail investor, you might not know that it’s possible for many individual investors to assemble similar portfolio allocations and essentially ride along with some of the same top-quartile funds found in those multibillion-dollar institutional portfolios.
The biggest difference is a sizable allocation to private market investments, or alternative investments, in institutional portfolios. Many retail investors allocate little if anything to private market investments, though that is changing with more accessible investor-friendly fund structures.
These new alternative investment funds, while not suited for every individual investor in the same way as mutual funds or exchange-traded funds, offer higher returns along with lower volatility and drawdown risk. Historical data shows that private equity, venture capital, private credit, real estate, and infrastructure investments offered outperformance compared to public stocks, with lower volatility. In fact, private equity allocations by state pension funds outperformed public stocks by over 4% annually.
With the private investment market being roughly 10 times larger than the public market, there are significant opportunities for investors willing to explore these avenues. Due diligence is crucial, but the benefits of alternative investments are undeniable. As the landscape evolves, more individual investors are gaining access to these opportunities, aligning their portfolios with institutional strategies and potentially reaping the rewards of higher returns and reduced risk.
