Alternative investments, often referred to as “alts,” encompass a broad category of assets outside traditional stocks, bonds, and cash. This includes private equity, private credit, hedge funds, real estate, infrastructure, commodities, and more. What sets alternatives apart is their unique return drivers, lower correlation to public markets, and the potential to enhance diversification in a portfolio.
When thoughtfully integrated alongside public investments, alternatives can play a vital role in portfolio construction. By blending asset classes that react differently to market cycles, investors may reduce overall volatility while aiming for higher long-term returns. The result is a more resilient portfolio, one that’s not solely dependent on the direction of equity or bond markets.
For long-term investors seeking to dampen risk, capitalize on niche opportunities, and access institutional-style strategies, alternative investments offer a compelling addition to the toolkit.
Private Equity
Private equity refers to investments in privately held companies, typically executed through limited partnerships managed by professional investment firms. These firms acquire, grow, and eventually exit businesses through strategic sales or public offerings, with the goal of generating outsized returns. Investors in private equity gain access to companies not traded on public exchanges, often gaining early exposure to innovative, high-growth enterprises.
The primary appeal of private equity lies in its potential to deliver superior long-term returns, particularly when managers can improve operational efficiencies or unlock strategic value. The extended investment horizon aligns well with investors focused on long-term capital appreciation. However, private equity is not without its drawbacks. Chief among these is illiquidity: capital is typically locked up for 7–10 years, limiting access to funds. Valuation is also less transparent, with private company metrics often based on internal models rather than market pricing. Additionally, the outcome is heavily dependent on the skill of the private equity sponsor, introducing significant execution risk.
For investors with higher risk tolerance and longer time horizons, private equity can serve as a powerful growth engine within a portfolio. It is particularly effective as a complement to public equities, providing exposure to unique opportunities that traditional markets may miss.
Private Credit
Private credit, sometimes referred to as direct lending, involves non-bank institutions extending loans to small and mid-sized companies. These loans can take many forms, including senior secured debt, mezzanine financing, or distressed credit strategies. This asset class has grown substantially in recent years, as banks have retreated from certain types of lending following post-crisis regulatory reforms.
The appeal of private credit lies in its yield profile. Investors can often earn significantly higher interest rates than those offered by traditional fixed income securities, with the added benefit of negotiated terms that offer downside protections such as covenants or collateralization. Importantly, private credit also tends to exhibit low correlation with public bond markets, helping to smooth volatility in broader portfolios.
Nonetheless, private credit carries real risks. Credit risk is foremost among them, borrowers may default, especially in a deteriorating economic environment. Liquidity is also limited, as these instruments are not easily traded on secondary markets. Finally, private credit managers must carefully assess and monitor underwriting risk, especially in bespoke or niche transactions.
In a portfolio context, private credit can be particularly attractive to income-oriented investors or those looking to diversify away from traditional duration-sensitive bonds. Its role as a fixed income substitute is growing, especially in today’s low-yield environment.
Hedge Funds
Hedge funds are pooled investment vehicles that employ a wide array of strategies designed to produce returns uncorrelated to traditional markets. These may include long/short equity, event-driven investing, global macro strategies, or arbitrage. Unlike traditional mutual funds, hedge funds have far greater flexibility in how they manage risk and seek returns.
The primary benefit of hedge funds is their potential to generate absolute returns across different market cycles. Skilled managers can profit in both rising and falling markets, often by exploiting inefficiencies or mispricing’s. Additionally, hedge funds frequently use tools like short selling, leverage, and derivatives to manage risk or enhance returns, tools not commonly available in long-only strategies. This flexibility makes hedge funds powerful diversifiers, especially when used in moderation.
However, these same tools introduce complexity and risk. Leverage can amplify losses, and performance dispersion between managers is high. Hedge funds also typically charge higher fees than other investment vehicles, with performance-based structures that may reduce net returns. Transparency can also be limited, making thorough due diligence essential.
Hedge funds fit best within a portfolio as a source of non-correlated returns. For investors seeking reduced volatility, downside protection, or unique return profiles, allocating to hedge funds can offer meaningful benefits when properly integrated and overseen.
Real Estate
Real estate investing encompasses direct ownership of physical properties, as well as indirect exposure through vehicles like Real Estate Investment Trusts (REITs) or private real estate funds. This asset class provides a combination of income generation and long-term appreciation potential, making it a cornerstone of many institutional portfolios.
One of the key attractions of real estate is its ability to generate steady income through rental payments. In periods of inflation, real estate tends to perform well, as property values and rents often rise with broader price levels. Real estate also offers the appeal of tangibility, investors own something physical, which can provide a sense of security and utility.
Yet, real estate comes with unique risks. Market cycles can significantly impact property values, especially in economically sensitive sectors such as hospitality or retail. Real estate also tends to be illiquid, with transactions taking months and often involving significant costs. Active management is another consideration, properties require maintenance, leasing, and ongoing oversight, which adds complexity and operational risk.
Within a diversified portfolio, real estate offers important benefits: income stability, inflation hedging, and low correlation with equities and fixed income. It is often used to anchor the portfolio with tangible assets that perform well in inflationary or low-growth environments.
Overall, alternative investments have moved from the periphery of portfolio construction to a more central role as investors seek diversified return streams, enhanced yields, and protection from volatility. Each asset class discussed above, brings a unique profile of risk and opportunity, as well as its own fit within a long-term investment strategy.
At Waterloo Capital, we believe alternative investments are not just a supplement to traditional portfolios, but they are a critical driver of long-term success in a world where markets are increasingly complex and correlated. Our approach to alternatives is grounded in rigorous due diligence, institutional-quality access, and a focus on sourcing opportunities that are typically out of reach for the individual investor.
Through our deeply established network of fund managers and institutional partners, we offer clients access to a curated lineup of private equity, private credit, hedge fund, and real estate opportunities that are typically reserved for large endowments, pension funds, or sovereign wealth entities. Many of these strategies have high minimum investment requirements or limited capacity, but through our platform, qualified investors can gain exposure to these high-caliber solutions in a way that is both strategic and scalable.
What sets Waterloo apart is our ability to identify niche, often overlooked segments of the market. From sector-specific private equity funds to opportunistic real estate strategies and thematic private credit vehicles, we focus on managers with deep domain expertise and differentiated edge. We perform rigorous manager underwriting, assessing not just historical returns but investment process, risk controls, team dynamics, and alignment of incentives.
Importantly, our alternative allocations are never one-size-fits-all. We work closely with clients to ensure that alternatives are integrated into the broader portfolio in a way that complements existing exposures, aligns with liquidity preferences, and matches long-term financial goals. Whether the objective is return enhancement, income generation, volatility reduction, or inflation protection, we build bespoke solutions that reflect the nuanced needs of each client.