By Staff Report Friday, August 8th, 2025

Welcome to Focus on Finance, a new report from the Business Times. We’ve had such a strong response to our Spring and Fall forecasts that we’re adding March and August panel discussions to give you a quarterly look at the markets.

For our Q3 Focus on Finance panel, we asked five experts to weigh in on the topic of alternative assets. Our Q&A was conducted via email with Editor Henry Dubroff and lightly edited. To suggest future topics, email me at [email protected]. For sponsorship and advertising, email Publisher Linda Le Brock at [email protected]. Our panelists are: 

Scott Hansen, managing director, Wells Fargo Advisors,

Lloyd Kurtz, chief investment officer, Montecito Bank & Trust,

Dylan Minor, co-founder, chief investment officer, Omega Financial Services,

Meghan Pinchuk, chief investment officer, Morton Wealth,

Arthur Swalley, co-founder, chief investment officer, Arlington Financial Services

Q. The definition of alternative assets has far outgrown the categories many of us grew up with — commodities and real estate. What’s your definition, and what are one or two attractive areas — or to be avoided?

Meghan: At a high level, alternatives are just anything other than stocks and bonds! However, to be valuable in a portfolio, alternatives need to truly have differentiated risk and return drivers. They need to be the yin to traditional assets’ yang. Today, we’re excited about opportunities in niche private credit, especially private loans to companies that are backed by tangible assets. While most bank loans, and even most private loans, rely on a company’s cash flows for repayment, asset-based loans have the added protection of collateral coverage in the form of assets like equipment, inventory and real estate. We believe these types of strategies can produce attractive returns in strong economic environments, but importantly, should also be resilient on the downside during challenging periods.

Dylan: Our definition of alternative assets centers on their ability to deliver returns that are less correlated with traditional public equities and fixed income. This includes private equity and private credit, which tend to be driven by idiosyncratic factors and may outperform during periods when public markets underperform. We also include more niche opportunities — such as structured products, derivative overlays, or even collectibles like classic cars or fine art — provided they exhibit a clear economic rationale for expected return. Crucially, we distinguish alternative assets from pure speculation. To qualify as an alternative, an asset must have a definable link to economic fundamentals. For example, we consider sovereign currency strategies a valid alternative asset class, whereas we currently do not categorize cryptocurrency as such. While we do help some clients allocate speculative capital to crypto, we view it as a separate, high-risk segment — not as a core alternative investment.

Arthur: The definition of alternative assets available to individual investors has broadened significantly over the past two decades. Arlington Financial defines the common feature and risk of alternatives to be illiquidity, and liquidity risk has not been a recent concern for alternatives. We see today’s alternative market breaking out into five main categories: Hedge Funds, Private Equity, Private Credit, Real Estate, and Commodities and Currencies (including cryptocurrencies). Traditionally, banks provided business loans from their balance sheets, and post-2008/9 Global Financial Crisis (GFC), their role has been assumed in great part by Private Credit providers. We are concerned that there hasn’t yet been a significant test of this asset class through a recessionary environment. In our view, credit risk is becoming underappreciated as memories of the GFC fade. As with many alternatives, Private Credit is pushing into the retail market, with accompanying high fees; as a saturated, expensive market, we think it carries too much risk for individual investors.

Lloyd: Alternative assets are probably best defined by exclusion: if it’s not a stock, bond, or cash (or a fund or ETF based on those asset classes), it’s an alternative asset. This means that the field is very broad.  Investors in alternatives should understand that they are almost always less liquid (harder to buy and sell) than stocks and bonds, and that there is considerable variation in returns among managers.  It’s best to work with an advisor with experience in the space, and to understand that the investment benefits — if achieved — will likely be long-term in nature. Going forward, we believe that private equity and private credit bear watching.  A recent survey found that advisors already make significant use of private equity and private credit, but primarily in accounts over $5 million.  For smaller accounts, conventional approaches still predominate. This could change, as private capital structures become more standardized, and the administration works to make it easier for investors to use private equity in retirement accounts. Private equity has been crowding out traditional small-cap managers for many years. A private owner can exercise greater control than a diverse group of public shareholders, and — so the reasoning goes — should be able to improve the performance of underperforming assets.  Meanwhile, private credit has benefited from the shift in bank lending toward higher quality, creating opportunities in areas with greater risk.  In both cases, these alternatives can potentially bring something to the portfolio that is not readily available in public markets.

Scott: Our definition of alternative assets is investments other than what we consider the three traditional assets of stocks, bonds, and cash. The four major categories of alternative investments are Hedge Funds, Private Equity, Private Debt, and Private Real Assets. Alternative investment strategies may deliver significant benefits to an overall investment portfolio by achieving greater diversification through the addition of strategies and assets that are historically low or non-correlated to traditional assets.  Private Equity is focused on return enhancement (with added risk), while the other three areas are more beneficial for volatility reduction of a traditional portfolio.  Private Debt and Private Real Assets may also offer reliable and diverse income streams to enhance those provided by dividends and interest generated in traditional portfolios.  Our current guidance is favorable in the specific areas of Commodities, Event Driven and Macro Hedge Funds, and neutral guidance on most other strategies.

Q. A few portfolio strategists are talking about finding space for alternatives in the 60-40 portfolio by reducing fixed income holdings. Do you share that view? Is that only for private credit?

Dylan: We view alternative assets as distinct from the traditional 60/40 portfolio, as their return drivers are generally uncorrelated with publicly traded stocks and bonds. That said, it’s reasonable to reallocate a portion of fixed income exposure to private credit, given its similar income profile—albeit with less liquidity and potentially higher return. More broadly, however, we don’t simply substitute alternatives into the 60/40 framework. Instead, we often segment portfolios into two primary sleeves: a traditional 60/40 core and a diversified alternatives allocation. The alternative sleeve may include private equity, private credit, and niche strategies such as derivative overlays, real assets, or collectibles—each selected for their economic underpinnings and diversification potential. A typical high-net-worth portfolio might allocate 60–70% to the traditional 60/40 mix and 30–40% to alternatives. This structure helps balance long-term growth, income needs, liquidity and downside protection—especially in a world of evolving market correlations.

Meghan: Alternatives of varying types are a core part of our client portfolios, not just satellites in a 60-40 portfolio. We approach asset allocation thinking more about growth vs. income and how much of each category individual clients should have exposure to. Alternative allocations can be substitutes for both stock and bond allocations, depending on each client’s individual goals as well as our current investment outlook. For example, if certain credit alternatives are targeting stock-like returns with better downside protection, for some investors, they may be a better stock substitute in a market environment that faces a lot of uncertainty. 

Lloyd: In contrast to private equity and private credit, we are more skeptical about the usefulness of many hedge funds. This month, the University of California finalized its divestment from hedge funds, a process that took five years. The primary motivation was that they hadn’t been good hedges:  UC Investments chief investment officer Jagdeep Singh Bachher commented that “in [crisis] scenarios, hedge funds didn’t hedge us. They exposed us to the opposite kind of risk, which actually meant they hurt us.”

Scott: A “60/40 portfolio” is more academic than practical, and there are usually better asset allocation strategies based on a client’s unique investing needs. We have been recommending the addition of alternative asset classes to our best client portfolios for years. At a minimum, we recommend 2% of a moderate growth and Income portfolio in cash for liquidity needs and another 4-5% to real assets like commodities. For clients in a moderate growth and income portfolio who qualify and where appropriate (considering a portfolio’s goals, risk tolerance, time horizon, etc.), we allocate anywhere from an additional 5-20% in alternative assets. Reductions in allocations come from both stocks and bonds to accommodate this allocation. Our current moderate growth and income portfolio targets currently sit at 38% stocks, 27% fixed income, 23% alternative investments, 10% real assets and 2% cash.

Arthur: The traditional 60/40 portfolio declined in useful function during the 2009-2022 zero-interest-rate Federal Reserve policy regime. The 40% bond allocation didn’t make any money, which fueled the search for alternatives that can. Private credit is one rapidly growing answer, which has the benefit of not being priced daily, giving investors the feeling of less volatility (a feature of alternatives that works if there is no liquidity need). Other solutions can include long/short, market-neutral, and arbitrage hedge funds. With interest rates for traditional liquid bonds moving back towards 5% or better over the past three years, the risks being taken to outperform bond returns have increased. Less regulatory oversight, combined with increased breadth of expensive distribution to individual investors, leads us to be concerned about increased risks of permanent loss of capital. This is especially true for the 40% of the portfolio that requires a return of principal investment. At Arlington Financial, we believe that private investments in real estate, businesses, and direct lending (private credit) are appropriate for investors who have the time and expertise to effectively analyze and monitor the opportunity. Alternatives are also appropriate for investors who have the financial resources to withstand substantial, permanent loss of capital.

Q. Great answers, panel. Anything else on your mind?

Dylan: One of the most exciting frontiers in alternatives today is the integration of financial and non-financial data to generate differentiated, low-correlation returns. Advances in artificial intelligence — particularly large language models — now allow us to pursue this with a level of rigor that was previously out of reach. This has been a core focus of my academic research over the past decade at UCLA, Harvard, and Columbia. Drawing on that work, I co-developed a strategy with BNP Paribas that brings these insights into practice, offering innovative alternative exposures for both their clients and ours. When implemented in a structured way, this kind of approach can potentially add 1% to total annual portfolio returns from just a 1% allocation. We’re at a unique inflection point—able to leverage centuries of progress in economics, computing, and data science. Newton and many scientists since call this standing on the shoulders of giants. In practice, it’s a powerful opportunity to deliver next-generation alternative strategies.

Meghan: While alternatives can offer strong diversification benefits in a portfolio, they also often have some illiquidity associated with them. We encourage investors to embrace some amount of illiquidity if it means reducing market or economic risk in a portfolio. However, it is essential to start with a financial plan and make sure clients’ needs are being met before allocating to less liquid investments. The prevalence of more retail alternative products today has a lot of positives when it comes to expanding access to alternatives. The caveat is that if retail investors are not well-educated on the limited liquidity of these products (during both good and potentially challenging environments), there are going to be a lot of unhappy investors. Investors should ideally work with an experienced advisor who can not only help them understand their liquidity needs upfront but also perform the necessary diligence to make sure they access the right types of alternative investments. 

Scott: The growth of the alternative investment industry throughout my career in wealth management is stunning.  The levels of manager talent, product innovation, distribution and investor awareness are at all-time highs.  Our firm has a robust alternative asset platform with unique offerings for our clients, and we are implementing strategies that make sense for our clients every day.  However, alternative investments are not for every investor, and particular challenges include leveraging, speculative investment practices, lack of liquidity, volatility of returns, limited pricing transparency, complex tax structures and delays in tax reporting, less regulation, and higher fees than mutual funds. It is crucial to seek the advice and guidance of a qualified and knowledgeable investment professional who can evaluate investments in this space not in a vacuum, but in the context of an investor’s goals, risk tolerance, time horizon, tax status, liquidity needs and current portfolio construction. 

email: [email protected]