How to Build an Enhanced Investment Portfolio with Alternative & Private Investments

February 26, 2024
Estimated Reading Time: 9 Minutes

In today's ever-evolving investment landscape, traditional vehicles like stocks, bonds, and cash are no longer the sole focus for savvy investors. As the search for diversification, higher returns, and portfolio resilience intensifies, a growing number of investors are turning their attention to the realm of alternative and private investments.

Private and alternative investments represent a diverse array of asset classes and strategies that lie beyond the confines of conventional markets. From private equity and venture capital to real estate, commodities, and hedge funds, these investment opportunities offer unique pathways to potentially enhance your portfolio performance and mitigate risk.

In this article, we'll discuss the opportunities these types of investments present, the risks they entail, and how including both in your investment portfolio can enhance your overall financial strategy.

What are alternative investments?

Alternative investments are financial assets that fall outside the traditional categories of stocks, bonds, and cash. These investments are often chosen by investors seeking to diversify their portfolios and potentially achieve higher return than those offered by traditional investments. For high-net-worth investors, these types of investment vehicles can offer additional benefits such as non-correlated returns, alternative streams of income, and other opportunities that might not be available to traditional investors.

Types of Alternative Investments

Real Estate

This includes properties such as residential, commercial, and industrial real estate, as well as real estate investment trusts (REITs) and real estate crowdfunding. Real estate is an attractive investment vehicle due to the potential for property appreciation. As property values rise, so does the equity in your investment, potentially leading to significant capital investment gains when you decide to sell. Additionally, real estate investments can provide a steady stream of income through rental properties, which can act as a hedge against inflation.


Commodities are investments in physical goods such as precious metals (gold, silver), energy (oil, natural gas), agricultural products (corn, wheat), and other raw materials. Commodities have historically exhibited low correlation with traditional asset classes, and including them in your portfolio can help diversify your holdings and reduce overall portfolio volatility. Many commodities have intrinsic value and serve as tangible assets. During periods of inflation, the prices of commodities tend to rise, as they are often seen as stores of value that maintain purchasing power. Investing in commodities can help protect your portfolio against the erosion of real wealth caused by inflation.

Private Equity

Private equity is an investment in a privately-held company that is not publicly traded on stock exchanges. Private equity investments often involve buying ownership stakes in companies, restructuring them, and selling them for a profit. Private equity investments provide access to a diverse range of investment opportunities that are not available in public markets. This includes investing in early-stage startups, mature companies undergoing restructuring, or buyouts of established businesses. Private equity investors can capitalize on market inefficiencies, industry-specific trends, and niche opportunities that may be overlooked by traditional investors in public markets.

Hedge Funds

Hedge funds are investment funds that employ various strategies to generate returns, often regardless of the direction of the market. Hedge fund managers have the flexibility to implement long and short positions, employ leverage, use derivatives for hedging and speculation, and engage in alternative investment strategies such as arbitrage, event-driven investing, and distressed debt. This flexibility enables hedge funds to seek positive returns in both rising and falling markets, potentially generating consistent profits and preserving capital across various market environments.

Venture Capital

Venture capital involves investments in early-stage companies with high growth potential. Venture capital firms provide funding to startups in exchange for equity ownership. By investing in venture capital, investors can gain exposure to high-growth opportunities and potentially realize substantial returns as these startups grow, scale their operations, and capture market share. Investing in a portfolio of startups allows you to spread risk across multiple companies, reducing the impact of any individual company's performance on the overall investment.

Private Debt

An investment in private debt is an investment in non-public debt securities, such as loans to private companies or structured debt products. Private debt cannot be easily bought or sold on a public market, which makes these investments more suitable for long-term investors. Private debt investments can provide steady income streams in teh form of interest payments. Unlike equity investments, where returns are tied to the performance of the underlying business, private debt investments typically offer fixed or floating interest rates, which provides investors with a stable cash flow and income generation.


Derivatives are financial contracts whose value is derived from the performance of an underlying asset, index, or entity. Examples of derivatives include options, futures, and swaps. Derivatives can be used as risk management tools to hedge against adverse movements in the price of underlying assets. For example, investors can use options contracts to protect their portfolios against potential losses from declining stock or commodity prices. This allows investors to mitigate downside risk and protect their investment portfolios from market volatility.

What are Private Investments?

Private investments are a specific type of alternative investment that involves investing in privately-held companies or assets. These investments are typically made by individuals, institutional investors, or private equity firms. Private investments can take various forms and offer opportunities for investors to gain exposure to early-stage startups, mature private companies, or specific projects.

Types of Private Investments

Some of the investment vehicles we outlined earlier -- specifically venture capital, private equity, and private debt -- fall under the category of private investments.

Angel investing and private placements are also private investments. Angel investors are individuals who provide capital to startups in exchange for equity ownership. They often have expertise in a particular industry and may offer mentorship and strategic guidance to the companies they invest in.

Private placements refers to the sale of securities directly to a select group of investors, typically institutions or accredited investors, without the need for public disclosure or registration with securities regulators. Accredited investors are individuals or entities that meet certain wealth or income thresholds and are deemed capable of understanding and bearing the risks associated with investing in unregistered securities. These offerings are conducted outside of public markets, allowing companies to raise capital privately.

Why should you include both alternative and private investments in your portfolio?

Including both types of investments in your portfolio can offer several potential benefits, the first being diversification. Private investments and alternative investments often have different risk and return profiles compared to traditional investments like stocks and bonds. Certain alternative investments, such as commodities, real estate, and hedge funds, may have low correlation with traditional asset classes. By including both alternative and private investments in your portfolio, you can hedge against market volatility and spread your risk across a broader range of assets, potentially reducing your overall portfolio volatility.

Alternative and private investments provide access to asset classes and investment strategies that are not readily available through public markets. For example. investing in early-stage startups through venture capital allows you to participate in innovation and potentially benefit from companies with disruptive technologies or business models. Additionally, these types of investments offer opportunities for portfolio customization based on your risk tolerance, investment goals, and time horizon. You can tailor your allocation to these assets according to your preferences and objectives, helping you build a well-rounded investment portfolio.

Private investments and certain alternative investments, such as private equity and venture capital, have the potential to generate higher returns than traditional investments over the long term. These investments often involve taking on additional risk, but they can also offer opportunities for significant capital appreciation. By incorporating both types of investments alongside traditional assets, you can potentially optimize your portfolio's risk-adjusted returns. Modern portfolio theory suggests that combining assets with different risk-return profiles can lead to more efficient portfolios that offer better risk-adjusted returns.

What are the risks of alternative and private investments?

Alternative and private investments come with unique risks that investors should carefully consider before allocating capital to these asset classes. Some comon risks associated with these investments include:

  • Illiquidity: Many private and alternative investments have limited liquidity, meaning they cannot be easily sold or converted into cash. Investors may face challenges in accessing their capital when they need it, especially if investments have lock-up periods or redemption restrictions.
  • Limited Due Diligence: Conducting thorough due diligence on private and alternative investments can be challenging due to limited public information, proprietary strategies, or confidential data. Investors may face difficulties in assessing the quality of the investment opportunity, the credibility of the investment manager, or the potential risks involved.
  • Complexity: Alternative investments frequently involve complex structures, strategies, and legal arrangements. Investors may struggle to understand the intricacies of these investments, increasing the risk of making uninformed decisions or overlooking key factors that could affect performance.
  • Performance Risk: Alternative investments do not always perform as expected. While they may offer the potential for higher returns, they also carry the risk of underperformance or loss of capital, especially if investment strategies fail to deliver the anticipated results.
  • Fee Structure: Many alternative investments come with higher fees and expenses compared to traditional investments. Management fees, performance fees, carried interest, and other charges can erode returns over time, reducing the net profitability of the investment.

Given these risks, it's essential to conduct thorough due diligence, assess your risk tolerance, and consider your investment objectives before allocating capital to private and alternative investments. Consulting with a qualified financial advisor can also help investors navigate the complexities of these investment vehicles and make informed investment decisions.

Consider including alternative and private investments in your portfolio.

Alternative and private investments can help you diversify your portfolio, protect against volatility, and provide unique opportunities not available in public markets. As you consider the next steps in expanding and fortifying your investment portfolio, we invite you to leverage the expertise and resources of our team at Watersound Wealth Advisors. With over $4.8 billion assets under management (AUM) and experience with helping over 1,800 clients optimize their wealth, our team would welcome the opportunity to help you build a comprehensive plan to manage your wealth and reach your financial goals. Contact us here to learn more and schedule your complimentary Portfolio X-Ray.

Important Disclosure Information

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