Five Downsides of Investing in Alternatives
Demand for alternative investments is increasing, but these complex options might not be the best fit for ordinary investors.


Over the past couple of years, investors have demonstrated a strong appetite for alternative investments such as private equity, private credit, real estate, collectibles and more.
According to research and analytics firm Prequin, the global market for alternative investments will be $18.3 trillion by 2027, up from $9.3 trillion at the start of 2022. From 2015 to 2021, the market grew at a rate of 14.9% annually.
The increasing demand for alternatives — once exclusively the province of institutional investors — comes as investors seek to inject alpha into portfolios following a historic double-digit down year for both stocks and bonds. With the rise of fintech platforms, these opportunities, which were previously reserved only for well-connected, ultra-high-net-worth investors, are now fully available to the masses.
From just $107.88 $24.99 for Kiplinger Personal Finance
Be a smarter, better informed investor.

Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
But are alternative investments right for everyone? Unlike public markets, alternative investments are far more complex and can potentially tie up investor money for years at a time. While there are many benefits to alternative strategies, investors must also understand the downsides. Here are five aspects to consider when determining whether to invest in alternatives:
1. Longer time horizons. Alternative investments are inherently illiquid, meaning investor money could be tied up for roughly five to seven years — or even up to a decade.
Despite the rise of liquid alternatives (liquid alts), which make alternative investments available through mutual funds or ETFs, the investments themselves are illiquid, so funds must limit redemptions to prevent them from having to sell the underlying asset.
2. The potential for “gates” and fees. To limit redemptions and prevent a run on a fund, liquid alternatives funds will often impose a “gate” if more than 5% of investors want to exit the investment per quarter. This means that once a fund reaches the 5% threshold, investors will not be able to exit the investment.
Investors may also have to pay higher fees on these strategies, which limits their potential return value.
3. Complex tax reporting. Unlike stocks and bonds, which are reported to the IRS via a 1099-B form, alternative assets are partnerships that require investors to file Schedule K-1 forms. These are far more complex than 1099 forms because there is no standard format.
Additionally, since the underlying company must file its business tax return first, the forms arrive much later, typically in March or April, or even as late as the fall if the company files an extension, making tax filing more difficult.
4. Lack of control. Since alternative investments are limited partnerships, the fund manager holds all the control and can decide how long to invest and when to sell.
This might work well enough for an endowment or an ultra-high-net-worth investor who is sitting on piles of money, but it might be a problem for someone with less cash on hand.
5. Potential for underperformance. Data from Dimensional found that from June 2006 to June 2022, U.S. liquid alts funds have underperformed broad indexes that track equity and fixed-income markets.
In addition to underperformance, liquid alts may not offer appropriate diversification — which has long been a key reason for investing in this asset class in the first place — as these funds build on the same foundations as the global stock and bond market.
Investors should think carefully before diving in
While alternatives have become more popular and mainstream, investors should think carefully about all the factors before investing in this type of strategy. Will you need access to your money in the near term? Are you willing to pay higher fees or potentially run into gates that prevent you from exiting the investment? Do you have the wherewithal to manage complex tax reporting requirements?
Alternatives can be an effective strategy for institutions, endowments and ultra-high-net-worth investors that have excess cash reserves and can leave the management of these strategies to their larger teams. But smaller investors should think carefully about their goals and strategies before making a commitment. You can often achieve the same financial outcomes through well-diversified portfolios composed of traditional equities and fixed income.
ALINE Wealth is a group of investment professionals registered with Hightower Securities, LLC, member FINRA and SIPC, and with Hightower Advisors, LLC, a registered investment advisor with the SEC. Securities are offered through Hightower Securities, LLC; advisory services are offered through Hightower Advisors, LLC.
RELATED CONTENT
- Five Ways to Invest in Water
- Pros and Cons of Adding Alternative Investments to Diversify Your IRA
- How to Get into Alternative Investing
- How High-Net-Worth Families Can Start Investing in AI
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.

Peter J. Klein, CFA®, CAP®, CSRIC®, CRPS®, is the Chief Investment Officer and Founder of ALINE Wealth, a wealth management firm that specializes in providing clients with financial planning advice for every stage of their lives. Along with Peter’s deep financial wisdom, he adds considerable acumen in philanthropy, helping clients navigate family trusts, institutions, and nonprofits.
-
Seven Surprising Reasons Retirees Are Going Back to Work
Sure, money is a big reason to come out of retirement, but it's not the only reason retirees are doing it.
-
Dow Gains 617 Points as Rate Cuts Near: Stock Market Today
Wednesday's economic data didn't shift Wall Street's expectations that the Fed is preparing for a rate cut at next week's meeting.
-
Four Clever and Tax-Efficient Ways to Ditch Concentrated Stock Holdings, From a Financial Planner
Holding too much of one company's stock can put your financial future at risk. Here are four ways you can strategically unwind such positions without triggering a massive tax bill.
-
Beyond Banking: How Credit Unions Serve Their Communities
Credit unions differentiate themselves from traditional banks by operating as member-owned financial cooperatives focused on community support and service rather than shareholder profit.
-
Answers to Every Early Retiree's Questions This Year, From a Wealth Adviser
From how to retire in a crazy market to how much to withdraw and how to spend without feeling guilty, a financial pro shares the advice he's given this year.
-
The Risks of Forced DST-to-UPREIT Conversions, From a Real Estate Expert
Some new Delaware statutory trust offerings are forcing investors into 721 UPREIT conversions at the end of the hold period, raising concerns about loss of control, limited liquidity, opaque valuations and unexpected tax liabilities.
-
I'm a Financial Adviser: You've Built Your Wealth, Now Make Sure Your Family Keeps It
The Great Wealth Transfer is well underway, yet too many families aren't ready. Here's how to bridge the generation gap that could threaten your legacy.
-
Want to Advance on the Job? Showing Some Courtesy and Appreciation Could Help
Two business professors share their insights about the impact of digital communication on the social skills of some in Gen Z and the importance of good manners on the job.
-
From Job Loss to Free Agent: A Financial Professional's Transition Playbook (and Pep Talk)
The American workforce is in transition, and if you're among those affected, take heart. You have the skills, experience and smarts that companies need.
-
A Financial Planner's Top Five Items to Prioritize When Your Spouse Is Ill
During tough times, it's easy to overlook important financial details, but you'll be so much better off if you take care of these things right now.