In the latest episode of the Quarter Over Quarter podcast, hosts CEO Tom Moran, AIF® and President Don Drury sat down with Chief Strategy Officer, Chelsea Ganey, CFA, to unpack the growing role of alternative investments in client portfolios.
The conversation provided a concise look at how alternatives can complement traditional asset allocation, with topics ranging from the democratization of private markets to the nuances of liquidity, risk, and manager selection.
What Counts as an “Alternative”?
Ganey began the discussion by pointing out that alternatives can span from tangible assets like art, wine, bourbon, and land to more sophisticated vehicles such as private equity, private credit, private real estate, and infrastructure.
While the public tends to associate investing with stocks and bonds, alternatives have long been used by institutions to diversify portfolios, reduce volatility, and capture differentiated returns.
The key difference, she explained, is that private market investments don’t experience the day-to-day pricing swings of public markets. This lack of daily mark-to-market volatility smooths returns, which can help investors stay invested during turbulent times.
The Importance of Manager Selection
When it comes to allocating to private markets, manager selection is paramount.
“Doing due diligence on these managers is probably one of the best things you can do, or you need your financial advisor to do,” Ganey said. “There’s all sorts of things within private credit market itself that managers can specialize in.”
Ganey emphasized that the best outcomes come from rigorous due diligence: examining track records, underwriting standards, operational soundness, and compliance practices.
“We really try to be thoughtful in our manager selection,” she said of the firm’s approach. “We work with third parties to do initial reviews and then our team in-house and our investment committee does an additional layer of due diligence to make sure there’s multiple sets of eyes on these managers before we’re even considering presenting them to our clients.”
Weighing Risks and Rewards
While the benefits of alternatives are compelling, Ganey cautioned that they aren’t without drawbacks. The most significant challenge is liquidity. Unlike public equities and bonds, private funds often require investors to commit capital for longer periods. Some funds are semi-liquid, offering periodic redemption windows, while others may impose lockups or withdrawal “gates” to prevent mass liquidations.
Fees also tend to be higher than in traditional markets, reflecting the complexity of sourcing, structuring, and managing private investments. However, investors are typically compensated with higher expected returns, especially in private credit, which often carries floating rates and offers insulation against rising interest rates.
Private Credit vs. Private Equity
The episode highlighted how different alternatives serve different purposes.
- Private credit provides income-oriented investors with potentially higher yields than public bonds, though at the cost of liquidity. It can be a valuable diversifier for retirees or income-focused portfolios.
- Private equity, by contrast, is designed for long-term growth. These funds invest directly in companies, either by providing capital to scale or by executing buyouts to improve operations before eventually exiting through a sale or IPO. Holding periods are longer, often five to ten years, but the return potential is correspondingly higher.
Ganey also discussed secondary markets, where investors can buy stakes in existing private equity funds at a discount. These opportunities can offer better visibility into underlying assets and reduce exposure to the early-stage “J-curve,” where money flows out before returns start to accrue.
Democratization of Alternatives
A central theme of the conversation was accessibility. Historically reserved for large institutions and ultra-high-net-worth investors, alternatives are now more broadly available thanks to new fund structures, technology platforms, and reduced minimum investment thresholds.
“That’s been the biggest game changer in the past few years is really that democratization of alternatives, with new product structures, lower minimums to get into these and really the technology around it that makes it possible for us to scale and do this for our clients,” Ganey said. “It is something not to be done in lieu of public markets and every client is different, but it’s definitely a great compliment and something to consider if it’s right for their portfolios.”
Investors are categorized as accredited, qualified clients, or qualified purchasers depending on their income, net worth, and experience. These designations ensure that only those with sufficient resources and risk tolerance can participate in higher-risk, illiquid strategies.
The Behavioral Advantage
Interestingly, Ganey framed illiquidity not just as a drawback but as a behavioral safeguard. Because private investments cannot be sold instantly, they help protect investors from emotional decision-making during market downturns.
“Behavioral finance is fascinating,” she said. “It’s hard when I look at my own bank account or my portfolio. On days like we’ve seen recently, it’s a hard thing to see and stop yourself from making those bad decisions.”
This forced discipline can be beneficial, as history shows that staying invested is one of the most reliable ways to build long-term wealth.
How Much Should Be Allocated?
While every client’s situation is unique, Ganey suggested that many high-net-worth investors can reasonably allocate 10% to 20% of their portfolio to alternatives. The exact mix depends on income needs, liquidity requirements, and risk tolerance, but even modest allocations can enhance diversification and improve risk-adjusted returns.
As Ganey concluded, alternatives aren’t a replacement for traditional markets but rather a powerful complement. For investors with the right profile, they can provide resilience, diversification, and opportunity in an increasingly complex financial landscape.
If you’d like to learn more about how alternatives could complement your portfolio, reach out to a Moran Wealth advisor at Contact – Moran Wealth Management.