What are alternative assets?

Introduction to Alternative Assets

Alternative assets typically refer to investments that fall outside of the traditional asset classes commonly accessed by most investors, such as stocks, bonds, or cash investments. Due to their alternative nature, these investments may be less liquid than their traditional counterparts and may require a longer investment period before any material value is realized.

Explore each definition of the asset classes within alternative investments by clicking on the images below:

Traditional vs. Alternative Investments

Traditional investments are publicly traded investments in stocks, bonds, or cash. The traditional method of investing is via public markets, where companies sell shares to the general population via stocks exchanges, such as the FTSE, NYSE, and SSE. These types of investments are heavily regulated by financial authorities such as the SEC (Securities Exchange Commission) or the FCA (Financial Conduct Authority).

An alternative investment is a financial asset that does not fall into one of the three traditional investment categories. Alternative investments are complex and not heavily regulated. For this reason, most alternative asset investments are held by institutional investors or accredited, high-net-worth individuals.

Due to their lack of regulation, private markets are notoriously opaque compared to public markets. For example, private companies are under no obligation to reveal earnings or financial information, or report to shareholders, which means that information on these types of assets can be hard to find. This is why Preqin exists: to bring transparency and facilitate understanding across alternative assets with comprehensive data and best-in-class analytical tools.

Find out more about Preqin

Relative Size of Alternatives vs. Traditional Investments

According to the Securities Industry and Financial Markets Association (SIFMA), global equity market capitalization reached $101.2 trillion in 2022. According to Preqin data, global private market assets under management (AUM) grew to $16.7tn in June 2024, and is expected to reach $30tn by 2030.

What Are the Characteristics of Alternative Investments?

The table below examines some of the key differences between traditional investments and alternative investments:

How Is the Industry Structured?

The alternative assets industry has evolved over time to include a multitude of different industry participants: investors, fund managers, investment consultants, and a range of other service providers. Key industry players include:

• Asset Owners/Institutional Investors/Limited Partners

Asset owners are the source of capital for investment in alternative assets. Below you will find definitions for some key investor types within alternative assets:

Asset owners make capital commitments to funds, undertaking due diligence to determine which fund managers to invest with. This can be an extensive process, with many stages including quantitative and qualitative due diligence, an assessment of fund manager performance track record and legal due diligence.

• Asset Managers/Fund Managers

Asset/fund managers are responsible for investing and managing asset owners’ capital. A portion of invested money will belong to the manager, but the majority belongs to investors. The managers generate fees from investors in the form of a management fee and a performance fee that rewards them for strong performance. We cover fees in more detail during a later lesson called 'Private Capital Fund Terms'.

• Investment Consultants/Gatekeepers

Investment consultants assist asset owners with the management and planning of their investment portfolio and provide investment recommendations. They charge a fee which is often not linked to the profits generated by their recommendations.

Technically, investment consultants are service providers; however, in some circumstances, they can decide where to invest an asset owner’s money. For this reason, they are often referred to as ‘gatekeepers’ and are key to securing capital for many asset managers.

• Service Providers

‘Service provider’ is the collective term used to describe the parties that provide services to a fund. The main types of service providers include:

In this lesson, we explored what alternative investments are, which asset classes are covered, and how these differ from the better-known traditional investments within public markets. Now you know the characteristics of alternative assets and who invests in them, as well as how the overarching industry is structured across asset managers, investment consultants, and service providers.