The growth of alternative assets has been a defining theme in the global investment landscape. According to Preqin, alternative assets under management have more than tripled since 2015 and are forecast to eclipse $23 trillion by 2026. Although investor preferences are constantly evolving, their interest in alternative investments continues to grow.
2024 is shaping up to be a significant, albeit disruptive, year for alternative investments. Weaker economic growth, shifts in monetary policy, and innovations in technology will create new opportunities for alternative assets. Understanding this unique asset class can help investors diversify their portfolios by looking for opportunities beyond stocks and bonds.
An alternative investment refers to any financial asset that falls outside of traditional investment categories such as equities, fixed income, and cash. Over the past decade, the universe of alternative investments has grown to include various markets, including private equity, venture capital, commercial and residential real estate, private mortgages, commodities, and tangible assets. Oftentimes, alternative investments are more complex and less liquid than traditional assets and require engagement with financial advisors.
Thanks to globalization and advances in technology, alternatives are now accessible to a wider range of investors — not just the ultra-wealthy.
According to BlackRock, one of the biggest factors driving the growth of alternative investments is the ever-increasing demand for diversification. As we’ve seen over the past three years, traditional portfolio construction methods utilizing stocks and bonds no longer provide sufficient diversification during periods of volatility.
Investors are therefore tapping into alternative investments to generate higher returns, reduce volatility, and increase opportunities within their portfolios. Fund managers have listed diversification, low correlation to public markets, and reduced portfolio volatility as chief reasons for investing in alternative assets.
Trends in Alternative Investing in 2024
2024 is the year when disruptive technologies meet finance — and when real estate and mortgage investing come into increasing focus.
On the technology side, artificial intelligence (AI) is making dramatic inroads into everyday life. From stock trading to performing highly routine tasks, AI has sparked an arms race among big tech companies and even banks.
Industry research shows that robo-advisors — AI applications that provide automated financial advice and services — will manage up to $2.3 trillion in assets by 2027. Businesses are increasingly integrating AI into their products and services, creating industry-specific investment opportunities for AI technology developers. According to IDC research, global spending on AI hardware and software is forecast to top $300 billion by 2026.
Beyond AI, technology continues to disrupt traditional banking in new and profound ways. The emergence of neobanks, open banks, and Web3 payment systems are having a disintermediation effect with traditional banking services and cutting out the middlemen.
2024 is also expected to be a pivotal year for real estate. Economists expect central banks to begin lowering interest rates this year, with Capital Markets forecasting the Bank of Canada to slash its policy rate by 1.5 percentage points. This should provide a reprieve to the housing market, which has been adversely affected by rising mortgage rates. According to the Canadian Real Estate Association, home sales reached 14-year lows in 2023.
Commercial real estate’s next chapter will also come into focus this year, according to PricewaterhouseCoopers. In several markets, the post-pandemic office vacancy slump hasn’t improved, with commercial lenders accepting the possibility that “a lot of people won’t be returning to the office after all, or at least not nearly as often.” 2024 will be a big test for the commercial property market, especially in the United States, where roughly 14% of commercial real estate loans held by major banks are in “negative equity” where the outstanding loan balance exceeds the market value of the property.
Although the real estate sector is heavily influenced by mortgage rates, private mortgages are far more resilient to changes in monetary policy. That’s because, unlike major banks, private mortgage lenders set their own criteria for approving loans and charge higher interest than the prevailing market rate. Further, interest rate risk is lower with private mortgages as the average term is just 12 months. By comparison, the most common term for a traditional mortgage is 5 years. Millions of borrowers each year turn to private mortgage lenders for their short-term financing needs. By lending out their capital, private mortgage investors receive regular payments in the form of interest and fees collected from the borrower.
Beyond these themes, financial advisors have also flagged more generic alternative investment opportunities in 2024. Faced with a slowing economy, persistent inflation, and shifting monetary policy, financial advisors believe high-yield fixed income and private equity should be added to investor portfolios this year.
Opportunities (and Drawbacks) of Alternative Investments
There’s a reason why alternative investments are a $20 trillion asset class: they offer higher return potential, increase portfolio diversification, and are more flexible than rigid “60/40” investment strategies. As BlackRock reports, alternatives have also benefited from long-term “mega trends” that traditional portfolio building methods would have missed — trends in sustainability, technological innovation, and private equity.
For all their benefits, there’s often a trade-off when investing in alternatives. These assets are more complex, less liquid, and often charge higher fees than traditional assets. That’s why it’s recommended that investors work with a financial advisor when approaching alternatives, especially those nearing or saving for retirement.
According to Daniel Maccarone, co-head of global investment management analysis at Morgan Stanley, alternatives are especially effective when they provide alternatives to fixed income.
“The coming years are likely to feature higher interest rates and inflation than in prior economic cycles. That could be a headwind to stocks and bonds, and correlation between the two asset classes may stay elevated,” he wrote.
Michael Kitt, head of real estate equity investments at RBC Global Asset Management, says alternative assets are sophisticated strategies that are suited for cash flow-focused investors.
“Alternative assets give investors the ability to add value in a portfolio in a way they don’t have in the public markets with traditional stocks and bonds,” he said, while highlighting the benefits of assets that provide cash flow linked to inflation.
Private mortgages are fixed-income alternatives that provide a cash flow investment strategy. They can be tailored for performance to meet the risk-return profile of defensive, moderate, and high-yield-seeking investors.
Alternative investments like private mortgages are a dynamic asset class that can help investors diversify beyond the limitations of stocks and bonds. However, accessing alternatives is best done under the guidance of a qualified financial advisor who can tailor your investment strategies to align with market expectations as well as your risk tolerance and investment horizon.
CMI Financial Group is Canada’s leading private mortgage lender, with more than $2 billion in successful mortgage placements across the country. Our leading private mortgage investment program generates yields from 6% to 16% annually. To learn more about how you can become a private mortgage investor with CMI, contact us today and request a free consultation with a CMI Investment Manager.