The Place of Alternatives in your Portfolio

Diversification is the cornerstone of any resilient portfolio. While stocks and fixed income investments (bonds or sukuk) should be the core of one’s asset allocation, there is another layer that plays a decisive role: alternative investments. These include private equity, infrastructure, real estate, hedge funds, logistics, private credit, and venture capital. 

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A Counterbalance to Market Sentiment

Public markets (i.e. equities and fixed income) can be volatile, swayed by headlines, sentiment, and short-term macro shifts. Alternatives behave differently. Because they’re typically valued less frequently and tied to long-term projects or private businesses, their performance is less dependent on daily market moves. This gives them a stabilizing quality, offering smoother returns when public markets swing.

Take infrastructure, for example. Assets such as toll roads, energy grids, or airports generate income streams tied to regulation or contracts, rather than market fluctuations. Similarly, private credit often provides steady income through negotiated lending agreements, with returns less tied to market volatility.

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Why Private Markets Matter

The role of private markets is not to replace public ones, but to complement them. Investing in these alternative investments in addition to the traditional stock-and-bond mixes can bring you various benefits like:
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• Diversification: With low correlation to public markets, alternatives help portfolios absorb shocks more effectively.
  
  
• Resilience: Many alternatives, especially real assets like real estate or infrastructure, offer a degree of inflation protection and reliable cash flows.
  
  
• Access to Growth: Private equity and venture capital allow participation in businesses earlier in their lifecycle, before they go public.

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Investors often confuse these benefits with each other. Historical data suggests that public equities significantly outperform average hedge fund and real estate performance; however, the benefit of adding both to the portfolio is diversification and resilience, which lowers overall portfolio volatility. However, asset classes such as private equity and venture capital tend to focus more on increasing long-term returns. Together, these qualities mean alternatives can act as a steadying force, reducing overall volatility and broadening exposure to the global economy.

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Why Public Markets Remain the Centerpiece of Any Well-Allocated Portfolio

Public markets are simply larger markets. The estimated size of global public equity markets alone is around 100 trillion USD based on 2024 data, whilst the estimated size of accessible private markets is close to 12 trillion USD. That means there is much more opportunity and value to be captured for owning the global productive economy through public markets. Essentially, you are capturing less long-term risk through diversification, owning much more of the global economy, whilst generating a healthy long-term return. 
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The same can be said about private credit markets and other alternatives.

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How the World’s Wealthiest Invest

Family offices, which manage the wealth of some of the world’s wealthiest families, have long recognized the importance of alternatives. Recent reports show that, on average, 40–50% of family office portfolios are allocated to alternative investments, with private equity and real estate leading the way. This is not a trend; it’s a reflection of their strategic role in building resilient, long-term wealth structures.

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A Core Part of the Picture

Alternatives are becoming increasingly central to how global wealth is managed. By reducing reliance on public market sentiment and smoothing portfolio returns, they provide something that every investor values: stability in uncertain times.

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