At the other end, there are higher-risk strategies mainly focused on capital growth, such as private equity and opportunistic real estate, where value is captured through operational improvements and business growth over several years.  

Additionally, there are more liquid alternative strategies, such as hedge funds and catastrophe bonds (which transfer the risk of major disasters for insurers to investors). 

A key characteristic of alternative investments is that they are private in nature, meaning they are not traded on public exchanges. As a result, they are often only available to institutional or wholesale investors who have the scale to meet the large minimum investment thresholds - often in excess of A$10 million.  

Beyond their financial characteristics, alternative assets offer direct exposure to critical parts of the economy. These provide the essential services that Australians rely on, ranging from airports, roads and railways, to renewable energy and data centres.  

Also, alternative assets, such as private equity, may provide the growth capital and strategic playbook to allow founder-led businesses to scale their business. 

This asset class also extends into natural capital, which includes farming and water entitlements, and social infrastructure like healthcare and education. These assets are often referenced in discussions about long‑term economic infrastructure and structural trends. 
 

Four potential benefits of alternative assets 

1. Structural diversification 

Alternative assets often have minimal involvement with public equity markets as they are generally driven by idiosyncratic factors, such as specific operational turnaround in a private business, or factors like, for example, traffic volume on a toll road, rather than broad sharemarket sentiment. 

Water entitlement rights, for example, provide structural diversification to a portfolio as their value and returns are driven by weather, agricultural economics and government policy, rather than financial markets. 

As such, alterative assets may provide structural diversification to a portfolio.  
 

2. Inflation hedging 

Many alternative assets have a natural inflation hedging mechanism built into their revenue models. In infrastructure and core real estate, for example, lease agreements and service contracts often contain mechanisms to escalate prices as the consumer price index (CPI) rises. This means that as inflation rises, the revenue of the asset increases automatically.   

3. Illiquidity premium 

Many asset classes that fall under the alternative assets banner are inherently illiquid, requiring capital commitments that are typically locked up for five to 10 years.  

While the lack of exit capability is often viewed as a constraint, it may serve as a distinct structural advantage for institutional investors. By foregoing liquidity, investors are generally compensated with a differentiated return driver known as the 'illiquidity premium'.  
 

4. Stable income 

A key role of some types of alternatives in a portfolio is their potential to generate a consistent cash yield. Alternatives such as natural capital (water entitlements and agriculture), infrastructure and core real estate provide a yield profile that is largely insulated from the broader business cycle due to the necessity of the underlying services.  

Examples of these assets include toll roads and prime industrial buildings. In the context of a broader portfolio, this may help to protect returns during periods of public market volatility. 
 

Key risks 

While the illiquidity of the underlying assets may be a potential benefit, it also forms one of the main risks in alternative investing.  

The specific liquidity profile of alternative assets remains contingent on the individual strategy, meaning many asset classes within the alternatives universe require a five to ten year lock-up of capital, particularly when structured through closed-ended investment vehicles. This means that investors cannot readily liquidate positions.  

However, structures, such as a listed investment company (LIC) on ASX, may mitigate some of this liquidity risk by providing an exchange-traded entry and exit point, allowing investors to trade their shares daily despite the long-term, illiquid nature of the underlying private assets. Find out more on the features, benefits and risks of LICs. 

Secondly, unlike public markets that offer continuous price discovery, alternative assets rely on periodic appraisal-based valuations. The lack of real-time market pricing typically results in a reporting lag, where the holding value may not reflect the current interest rate environment or the exit multiples between the periodic valuation appraisals.  

Importantly, both the Australian Prudential Regulation Authority (ARPA) and the Australian Securities & Investments Commission (ASIC) have been particularly focused on forming stricter regimes around valuations, with the aim of making sure alternatives managers have robust valuation frameworks, and clearly defined valuation triggers.  

Thirdly, the sensitivity to interest rate shocks is significant in alternatives because of the higher level of leverage that investments such as private equity, real estate and infrastructure may hold in their portfolio holdings when compared to public equities.  

As a result, a macroeconomic rate shock does not just impact the discount rate used to value alternative assets but can also squeeze cash flows through higher debt-servicing costs.  
 

Longer-term considerations  

Wilson Asset Management (WAM) believes that, in an increasingly fragmented macroeconomic and geopolitical environment, the role of alternatives in a portfolio is more important than ever. 

In WAM’s view, long-term portfolios should be managed with both general sharemarket volatility and fundamental regime shifts (geopolitical and macroeconomic trends) in mind. 

WAM believes that by integrating several alternative asset classes, such as real assets, infrastructure, private equity, private debt and natural capital, investors may capture the diverse risk factors required to generate a steady income and achieve genuine portfolio diversification.  

Importantly, WAM views that investments in alternatives should be built on key investment themes with strong long-term tailwinds, which we consider to be: 

• Ageing population – this translates into increasing demand for healthcare services and businesses, and creates investment opportunities in real estate, infrastructure and private equity. 
• Digitalisation – this affects various sectors and industries and creates new investment opportunities in infrastructure and private equity. 
• Energy transition – this drives further capital investments into sectors such as renewable infrastructure and technology. 
• Food scarcity – this creates investment opportunities in real assets (e.g. agriculture, water rights, etc) and private equity.   

Conclusion 

Looking ahead, WAM considers that the more successful portfolios could be those that have effectively considered the structural forces that are reshaping our world.  

While the risks of illiquidity and interest rate sensitivity are inherent to alternative investments, WAM believes they are necessary trade-offs for accessing the real economy growth drivers and enhanced diversification that may make alternative assets an important component of a resilient portfolio. 
 

From ASX 

Investing in Listed Investment Companies and Trusts explains the features, benefits and risks of investing in listed investment vehicles on ASX.