Alternative assets add another dimension to a diversified portfolio by offering sources of return that behave differently from traditional shares and bonds. Below, we explore what they are, how they work, and the role they can play in supporting long term investment outcomes…
Alternative assets are investments that sit outside traditional shares and bonds. They include property, infrastructure (such as toll roads, airports, and utilities), private businesses that own assets such as vineyards and farmland, and commodities such as gold and oil. One of the key benefits of including them in a portfolio is that they tend to behave differently from shares and bonds. As a result, when share markets are falling, alternative assets may help offset some of that volatility by providing returns from different sources.
This is because many alternative assets generate their returns from real-world cash flows, such as rent, usage fees, and long-term contracts, rather than relying solely on market sentiment and news cycles that can influence share prices. Infrastructure assets, for example, often earn income through long-term agreements that can continue to generate revenue regardless of short-term market movements. These stable revenue streams can help improve portfolio diversification and support more consistent long-term returns.
Alternatives can also play a role during periods of rising inflation. Property and infrastructure revenues may increase over time alongside inflation, helping to preserve the purchasing power of investors’ savings. This inflation linked behaviour makes alternatives a useful complement to both shares and fixed income investments, particularly in environments where interest rates or living costs are rising.
The long-term return potential of some alternative assets is also attractive. Private businesses and private lending have historically delivered strong returns, reflecting the additional risks and longer investment horizons often associated with these assets. Many large institutional investors, including pension funds and university endowments, allocate a significant portion of their portfolios to alternative assets because of their potential to provide diversification, income, and inflation protection alongside traditional investments.
Today, listed versions of these assets, such as property trusts, listed infrastructure funds, and commodity ETFs, make them far more accessible to everyday investors than they once were, allowing investors to capture many of the same benefits without needing to lock money away for years at a time. This increased accessibility has helped alternatives become a mainstream component of diversified portfolios.
In summary, alternative assets can enhance portfolio diversification by providing sources of return that differ from those of traditional shares and bonds. Their potential for stable income generation, inflation protection, and lower correlation with public markets may help improve portfolio resilience and support long-term investment outcomes as part of a diversified investment strategy.
For more on how alternative assets fit within a broader investment mix, refer to our Asset Allocation article and the other articles on asset classes in the Insights section of our website.
