What counts as an alternative?
"Alternatives" means investments outside publicly traded stocks, bonds, and cash. They tend to share three traits. They are privately valued rather than priced daily on an exchange. They are less liquid than public securities. They charge higher fees in exchange for return sources you cannot get in public markets.
Private equity
Ownership stakes in companies that are not publicly listed. Managers acquire businesses through buyouts, growth capital, or venture funding, work to improve them, and sell years later. Companies are staying private longer, so a growing share of economic growth happens before an IPO.
Private credit
Loans made directly to companies by funds rather than banks. The category grew rapidly after banks pulled back from middle-market lending in the wake of the 2008 crisis. Loans are typically floating-rate, senior in the capital structure, and income-oriented.
Real assets
Real estate, infrastructure, timberland, and commodities. These are physical assets with cash flows often linked to inflation, including toll roads, warehouses, power transmission, and apartment buildings.
Hedge funds / liquid alts
Strategies that trade public securities in non-traditional ways, including long/short equity, macro, and relative value. In DC plans these usually appear as diversifying sleeves inside multi-asset funds rather than standalone menu options.
Guaranteed income
Not an alternative in the classic sense, but often bundled into the same conversation. Insurance-backed lifetime income can be embedded in target-date structures, enabled by the SECURE Act's fiduciary1 safe harbor for annuity selection.
What alts are not
They are not a guarantee of higher returns, a free lunch, or a substitute for saving enough. Net-of-fee outcomes depend heavily on which managers you access and how the vehicle handles liquidity. Average private funds have often failed to beat public markets after fees. Access and selection matter enormously.
Three ideas worth internalizing.
The illiquidity premium
Investors who can lock up capital for years have historically been paid for it. A 22-year-old's retirement account has a four-decade horizon. In principle, it is one of the most natural holders of illiquid assets in the economy. The irony of DC design is that the longest-horizon investors currently hold the most liquid portfolios.
Wide manager dispersion
In public equity, the best and worst active managers differ by perhaps a few percentage points a year. In private markets, top-quartile and bottom-quartile can differ by hundreds of basis points annually. Average access captures little or no premium after fees. Manager selection is the whole ball game.
Valuation is smoothed
Private assets are appraised, not traded by the second. Reported values move less than the market underneath them. Some of that is real diversification. Some of it is a measurement artifact. Both are worth understanding when reading a fund's volatility statistics.
A word on framing. Any single asset class taken in isolation looks either great or terrible depending on the sample period. The interesting question is what a modest, diversified allocation contributes to a total portfolio over decades, at reasonable cost, delivered through a vehicle a participant can actually use. That is what the rest of this site is about.