You’ve probably heard it: a friend at a cocktail party mentions an investment that “made a ton of money.” It sounds exciting. It also raises the most important question—how?
How did it generate returns, what was it invested in, and what did the investor have to give up (like access to their cash) to get those results?
Curiosity about alternative investments is rising because access is expanding—and because many investors are looking for ways to diversify beyond traditional stocks and bonds. But alternatives can be complex, illiquid, and uneven in quality. The goal isn’t to chase what’s trendy. The goal is to understand what you own, why you own it, and how it supports your long-term plan.
What “Alternatives” Actually Means
“Alternatives” is an umbrella term for investments that sit outside traditional publicly traded stocks and bonds.
Common examples include:
- Private credit (lending to companies outside of traditional bank channels)
- Private equity (buying and improving private businesses)
- Venture capital (investing in early-stage/high-growth companies)
- Real assets/infrastructure (e.g., projects tied to utilities, transportation, data centers, etc.)
A useful way to think about alternatives is that they often provide exposure to companies and opportunities you simply can’t buy on a stock exchange.
The Big Trade-Off: Illiquidity (and Why It Exists)
When an investment is illiquid, it means you can’t easily convert it to cash whenever you want.
Selling a public stock is usually a click-and-done experience. Alternatives are different.
Depending on the structure, your money may be committed for months—or years. That’s why these investments should never live in the “I might need this soon” bucket (home purchase, tuition, near-term lifestyle spending, etc.).
Structure Matters: Drawdown Funds vs. Evergreen Funds
Not all alternatives “lock up” capital the same way.
Two common structures:
Drawdown (Traditional Private Funds)
- Capital is called overtime (not invested all at once)
- Returns can look “ugly” early (fees + early costs + unrealized value), often described as the “J-curve”
- Liquidity typically comes much later as assets are sold
Evergreen (Newer Structures)
- Investors are usually invested more quickly
- May offer periodic liquidity windows (often quarterly), but not guaranteed
- Can include “gates” that limit withdrawals when many investors want out at the same time
This is why alternatives are not a “one-size-fits-all” decision. The structure should match your goals, timeline, and cash-flow needs.
Why Investors Consider Alternatives (Beyond the Hype)
- Diversification into a bigger opportunity set
Many sizeable U.S. companies are private—meaning public markets represent only part of the economic picture. That’s one reason alternatives can expand what you’re truly diversified across. - Different “feel” than public markets
Private investments are typically valued less frequently (often quarterly). That can create a smoothing effect versus daily market pricing—helpful for behavior, but also a reminder: less frequent pricing doesn’t eliminate risk. It changes how you experience it. - Potential return premium for patient capital (the “illiquidity premium”)
One reason investors consider private investments is the potential to be compensated for committing capital for longer periods. Because many private strategies can’t be bought and sold on demand, investors may expect an additional return for accepting those liquidity constraints—often referred to as an “illiquidity premium.” That said, it’s not automatic or guaranteed. Results still depend on the underlying risks being taken, the skill of the manager, and the fees and terms of the fund.
The “Invisible” Risk: Transparency and Due Diligence
Public companies report frequently, and information is widely distributed. Private investments can be far less transparent. You may see a fund position in your account, but not the underlying holdings in the same level of detail you’d get in public markets.
That’s why alternatives require deeper diligence:
- How does the manager actually make money?
- Is their process repeatable?
- Is the team stable and experienced?
- Are incentives aligned (are they investing alongside you)?
- Do fee structures match outcomes?
Regulators and industry bodies emphasize that private offerings demand careful diligence and suitability analysis.
A Common Mistake: Treating Alternatives as a “Tactical Trade”
One of the biggest misconceptions we see is treating alternatives like a short-term move: “This theme is hot—let’s jump in.”
But most alternative investments are designed to play out over years, not quarters. That means the decision should be strategic, not reactive. If your circumstances change, you can’t always “rebalance out” as easily as you can with public stocks and bonds.
A thoughtful approach often looks like:
- starting gradually,
- building exposure over time,
- and ensuring every commitment fits the bigger liquidity plan.
“Too Good to Be True” and the Cocktail Party Portfolio
Hype is powerful—especially when someone else’s results sound effortless.
But the smartest move is usually to step back and ask:
- What’s the story behind the return?
- What’s the risk that isn’t being mentioned?
- What happens if this doesn’t work—and can I afford that outcome?
Investor education resources often highlight red flags in private offerings and the importance of reviewing legitimate documentation and vetting claims that don’t add up.
How Much Should You Allocate?
There is no universal number. Allocation depends on:
- investable assets and liquidity needs
- time horizon
- risk tolerance
- and (importantly) your comfort with complexity, periodic reporting, and long holding periods
In practice, alternatives work best when they are sized intentionally inside a broader plan and stress-tested against real-life spending needs.
The Bottom Line
Alternative investments can be useful tools for the right investor, in the right structure, at the right size—when paired with real diligence and real education.
If you’re curious about private credit, private equity, venture capital, or other alternatives, the next step isn’t “find the hottest fund.” The next step is to understand what role (if any) alternatives should play in your unique plan—and how to implement them responsibly.
For more information on alternatives, we invite you to visit our Insights page to watch Why Alternatives Matter – Moran Wealth Management and The Power of Alternatives – Moran Wealth Management.
Sources
- Apollo Academy – “Many More Private Firms in the US” (private vs. public company landscape)
- FINRA – “Private Placements” (due diligence and suitability considerations)
- Ricciardelli, A., & Parhizkari, P. (2024, August 7). Is illiquidity a blessing in disguise for some investors? CFA Institute Enterprising Investor.
- U.S. Securities and Exchange Commission (SEC) – Investor Alert: “10 Red Flags That an Unregistered Offering May Be a Scam”