Reading more deeply into the headline risk of alternative investments

When the CEO of Morningstar sat down to speak with the president of the largest alternative asset management firm, he asked a question that is likely on many financial advisors’ minds.

While the head of the investment research, technology and portfolio management firm, Kunal Kapoor, acknowledged in his keynote interview with Jon Gray of Blackstone at Morningstar’s conference last month in Chicago that Gray’s firm “has not had trouble raising capital,” he pointed out that there has been “a noticeable slowdown in institutional fundraising.”

“So if you’re an advisor sitting here and you’re looking at this slowdown in fundraising,” Kapoor said, “it feels like a natural question to be asking, ‘Why is private equity slash private credit actually coming to us now when they’re struggling elsewhere to raise capital?'”

Despite the headlines around fundraising and redemption withdrawals across private investments in general over the past year, Blackstone raised about $70 billion in the first quarter, with half from institutional clients, Gray noted. But the firm has also been “been focused on individual investors and their advisors for 25 years,” and Gray’s team continues to believe that retail clients are “underserved” when it comes to private investments, he said.

“We feel incredibly proud of what we’ve been able to do in the private space for our investors,” Gray said. “So I think, for advisors, the question is, ‘is this manager committed to the space? Do they have the infrastructure? Do they have the ability in the semiliquid world to deploy the capital? Do they have the commitment to transparency to do evaluations in the right way?’ I think manager quality and commitment to this space really matters. If done in the right way, this has been a very helpful part of your portfolio.”

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A grain of salt

In their conversation and three other panels at the event with around 2,000 attendees at Navy Pier, portfolio managers and other experts discussed the tradeoffs between risks, returns, fees and diversification from private investments. To be fair, the speakers talked with a vested interest in convincing advisors and retail investors to get comfortable with alternative investments that tend to charge higher and more complex fees and bring greater risk with any outsize returns.

A day earlier at the conference, Kapoor had announced that Morningstar’s wealth unit collaborated with Apollo Global Management, Franklin Templeton and JPMorgan Asset Management in launching model portfolios that combine public and private investments in a way that he said will bring “independent research, disciplined asset allocation and transparent pricing together in a single framework.”

Nevertheless, each of the panels delivered helpful takeaways for advisors and clients trying to make sense of many different kinds of alternative investments amid the noise.

In a discussion about liquid alternative vehicles that avoid the lock-up risks of many private assets, Catherine LeGraw, a partner and member of the asset allocation team at investment management firm GMO, gave a four-part criteria for evaluating them: after-fee returns, correlation, opportunity and leverage.

“It’s critical to know, what do you need to get from these strategies and how is that going to happen, how are they going to deliver on that promise?” LeGraw said. “Those are our four pillars to go after what we need.”

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Key drivers, diversification and dog years

Diversification against the threat of portfolio concentration has always represented one of the most important goals of investing. Placing a variety of assets into a portfolio protects against the volatility of one stock or of equities in general.

“That is sort of the holy grail, something that adds returns and reduces risk,” said Michele Freed, the head of research for U.S. model portfolio solutions with giant asset management firm BlackRock. “We like to have different types of assets that have low correlation to each other that are each providing ballast against different types of risks.”

Investors have traditionally found a hedge against too much equity concentration through assets like gold, but many more these days could be considering cryptocurrency investments like bitcoin. The latter investment has “been regime dependent,” in terms of the way that the regulatory trends favor bitcoins and how the parties occupying the White House view them, according to Juan Leon, a senior investment strategist with Bitwise Asset Management, a cryptocurrency investment firm.

“It has different return drivers than stocks and bonds,” Leon said. “You want these different assets in a portfolio, and you want to diversify the diversifiers in the portfolio. I like to say that bitcoin and gold rhyme over a decade but diverge over a quarter.”

Multiple events playing out across the globe can alter that equation, he and the other panelists said. The way Freed discussed the twin impacts of AI valuations and oil spikes and troughs during the war in Iran highlights the “interconnected dependencies” of investing in assets like gold, commodities and crypto, according to Greg Sharenow, a managing director and portfolio manager who leads the commodities group with fixed-income investing giant PIMCO.

“That is an extraordinary backdrop,” Sharenow said. “2026 is only six months old and I feel like I might have aged seven years like a dog.”

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Healthy comparisons

Another aspect of investing in alternative assets that has always posed challenges revolves around the complexity of the vast universe of the various kinds of products. So advisors can provide value by explaining them to clients with an emphasis on how they are performing against their benchmarks, according to Ranjan Bhaduri, the founder and CEO of alternative investment research firm Bodhi Research Group. For liquid alternatives investments in particular, that often proves beneficial when investors could be asking an advisor why their vehicle isn’t faring as well as an illiquid one with a different profile and role in a portfolio.

“The best I think an advisor can do is break the portfolio into the different components,” Bhaduri said. “Liquidity itself has a value. From a behavioral finance perspective, human beings tend to underestimate the value of liquidity.”

With so much risk posed by alternative vehicles in general, they require that level of careful scrutiny and discussion, according to Brian Portnoy, the founder and CEO of behavioral finance training and consulting firm Shaping Wealth. The panel with him, Bhaduri and LeGraw homed in on liquid alternatives in particular, but those can take many forms.

“We know that, underneath the tent here, we’ve got eight, 10, 12, 15 different subcategories, so it’s not difficult at all to imagine the diversification benefits,” Portnoy said. “Healthy skepticism is where we should start.”

LeGraw’s firm takes that type of approach for what she described as “selling what is up” and “buying what no one cares about” within a multi-asset portfolio, she said. “We say, ‘This is what they have done, here’s our forecast for what they can do from here, given their valuations.'”

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Weighing headline risk vs. actual risk

As redemptions and fears of defaults affect the valuations of many private credit instruments, investors should keep their position in the structure of those deals in mind, according to Brad Marshall, the global head of private credit strategies at Blackstone. Over his more than two decades with the firm, he has seen just 36 defaults among the companies out of the many thousands of them using its nontraditional financing, he noted.

“What gets lost in the storyline is, of course there’s going to be defaults, and we can walk through all of ours,” Marshall said. “I remember them each individually, but, because the asset class has so much yield, yield is incredibly defensive from a return standpoint. And, because you’re senior, that’s incredibly defensive as well, because in the event of default you get to own, operate and control the business, and hopefully get some recovery, such that over a long period of time we’re talking about a range of actually pretty attractive positive returns versus what the headlines would suggest.”

One common mistake investors make in private credit comes from waiting until they hear about such headlines to consider the need for a redemption, according to Caitlin Nemeth, a portfolio manager for the Cliffwater Corporate Lending Fund and a member of alternative asset management firm Cliffwater’s credit research and investment team.

“If you’re starting to think about redemptions at the time of stress, you’re too late,” she said. “You need to be thinking about your liquidity out of the gate. It can’t just be once the redemptions first come in. There’s a structural flaw at that point.”

Further errors may emerge from judging any investments simply by their rates of return, without other context, and assuming that they can only find what they’re looking for in private vehicles, according to Sonali Pier, a managing director at PIMCO who is the lead portfolio manager for diversified income and co-manager of the U.S. leveraged finance desk.

“I think the first highlight is that it’s not necessarily about public or private outcomes, it’s about adequate compensation for the difference in liquidity, complexity and economic sensitivity,” she said. “What’s important right now, and what’s been really interesting in public markets is, with base-rates resets, we’re in a situation where these yields are generationally attractive, and we’re seeing interest from equity markets, from those in cash, into fixed income, because of this opportunity here today. Traditionally, you may have had to choose between liquidity, diversification and quality, and today you can have all three of those really at the same time.”

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A key driver of returns in any cycle

Those ideas may prove especially beneficial for the long term, even in a regulatory environment marked by, for example, the Labor Department’s proposal to give more 401(k) investors access to alternative investments. On the other hand, the prospect of more alternative assets in retail retirement portfolios is affecting how Blackstone approaches its fees, Gray said.

“As we shift into the retirement space where there’s more focus on certainty, and, in some cases, they don’t want to see incentive fees, we’ve said, ‘Yes, we will look at flat-fee options,'” he said. “I think what’s interesting is, part of the reason why we’re able to charge less is, of course, you don’t have the same distribution costs, you’re not paying wirehouse points up front, and we also expect the duration of the capital will be longer because it’s in a retirement account, so it gives you a little more flexibility. And, again, the focus is, can we deliver a good return, net of fees?”