Focus On... The Rise of Alternatives

As companies stay private longer and public-market volatility has recently increased,¹ advisors are turning to alternatives to deliver enhanced returns and portfolio diversification for their clients. Whether you’re looking to enhance your understanding of alternative strategies or explore how Focus Investment Partners can support your growth, this episode is full of sharp, practical insights.

Why Alternatives?

The term “alternatives” is often misunderstood, so we began by defining it. "Alternatives cover a vast amount of different strategies, products, and solutions,"² explained Stephen. “Anything that is not traditional, long-only, unlevered public equity, public fixed income, or a cash-oriented strategy should be classified as an alternative."

This includes investments involving illiquidity, leverage, or shorting. Despite their long history, Stephen highlighted why alternatives are becoming a core focus for advisors today. "A huge part of the economy is accessible only through private markets, which alternatives provide,” said Stephen. Investments like sports franchises, music royalties, and reinsurance markets are mostly available through alternative structures.

Alternative investments may also provide strong return potential and risk mitigation, potentially enhancing long-term return profiles and creating a smoother experience for both advisors and clients.

Tim emphasized the return differential between private and public markets. “If you think about private equity over the last 15 years or so, the median return … is probably around fifteen percent³ —a nice premium to public markets.” From an advisor’s perspective, he argued, alternatives aren’t just an option—they are a responsibility to at least explore based on your client’s circumstances. "If you’re a financial advisor, asset allocation is your job. So rather than asking, ‘Why alternatives?’ you should be asking, ‘Why not?’"

What’s Holding Advisors Back?

Despite the strong case for alternatives, many advisors hesitate to adopt them due to three key barriers: education, operations, and access.

Many lack the education or exposure needed to confidently recommend alternatives. Operationally, integrating alternatives into an advisory practice has historically been cumbersome, but platforms like CAIS are making that process far more efficient. And when it comes to access, scale plays a major role—many smaller firms struggle to gain entry to top-tier alternative investments.

That said, Stephen made an important point: those who chose not to adopt alternatives without the proper knowledge or due diligence made the responsible choice. “I want to applaud many advisors that have not adopted alts if they weren’t ready for it, and they couldn’t actually diligence it,” he said.

Now, however, the landscape for Focus firms’ advisors has changed. With Focus Investment Partners, advisors have access to a dedicated team of investment professionals with decades of combined experience conducting rigorous due diligence and research. This support helps advisors to confidently integrate alternatives into client portfolios while upholding the fiduciary standard.

The Benefits of Alternatives for RIAs

For those who do incorporate alternatives, we believe the benefits are substantial. From a growth perspective, there are three key advantages:

1. Organic Growth – Clients are already investing in alternatives, often outside their primary advisory relationships. By offering alternatives in-house, advisors can capture more wallet share and attract new clients seeking differentiated strategies.
2. Inorganic Growth – Smaller firms that lack access to alternatives may seek partnerships or acquisitions with firms that do have access, creating a competitive edge for acquirers in M&A discussions.
3. Market Growth – Alternatives can enhance long-term portfolio returns, helping advisors grow their businesses over time. While much focus is placed on organic and inorganic growth—areas advisors can directly influence—market-driven growth from alternatives can significantly compound over time.

Are We at an Inflection Point for Alternatives?

Many have asked whether we’re at an inflection point in the alternatives space. Tim believes we are at an inflection point, and perhaps even past it. This shift isn’t just about market adoption—it’s about a fundamental restructuring of how alternatives are packaged and accessed. “It’s not a structural evolution, it’s a structural revolution,” said Tim.

The rapid expansion of tender offer funds, interval funds, and new types of BDCs is reshaping accessibility, making alternatives more available to a broader range of investors. The pace of innovation is so intense that, as Tim noted, “We were in a meeting with a large asset manager last week that actually invented a product structure in the meeting. I’m only half kidding about that.”

This wave of transformation is being met with measured, sustained growth. Over the last two decades, assets in alternatives have increased nearly fivefold, reaching nearly $22 trillion today.⁴

Navigating Risks & Implementing Alternatives Effectively

As alternative investments grow, so does their complexity. Advisors and clients exploring alternatives should be mindful of certain risks, including:

• A proliferation of new products and providers
  • The surge in alternatives has led to a flood of new financial products. “You have to be careful with these new products,” Stephen cautioned. “History shows that while some are great for clients, others are misunderstood or not fully appreciated.”
• Nuances of structure and strategy
  • Many advisors assume alternative products function like traditional investments, but the reality is often quite different. “People don’t appreciate nuances of structure, and advisors may not fully educate their end clients on what they’re getting into,” said Stephen.
• Commitment sizing, due diligence, and operational support
  • Selecting investments is just the first step. Advisors also need expertise in structuring portfolios, assessing liquidity constraints, and implementing solutions effectively.

That’s why we created Focus Investment Partners—to equip our firms with the expertise, resources, and infrastructure needed to integrate alternatives smoothly. Through Focus Investment Partners, we offer:

• Focus Investment Partners Select – High-conviction external solutions with tailored research, education and distribution support.
• Focus Affiliated - Internal product offerings with access to our investment teams, top-tier service, and top-quartile performance.
• Technology & Operational Support – Our partnership with CAIS provides a centralized technology solution that is designed to streamline alternative investments across the Focus network.

Closing Thoughts

Focus Investment Partners is a valuable resource for RIAs looking to incorporate alternatives into their practice. A key advantage of this platform is the strength of the Focus network itself.

Many of our firms’ clients are leaders in venture capital, private equity, private credit, and real estate. These individuals and families have built some of the most influential firms in the industry, and they turn to Focus firms’ advisors for their wealth management needs. That network is an invaluable asset when building relationships with top-tier managers and securing access to premier investment opportunities.

At its core, Focus Investment Partners is about bringing the best of our network together—clients, advisors, managers, and platforms—to create an optimal solution for all involved. It’s not just about access; it’s about education, support, and a seamless end-to-end experience that makes alternatives more manageable for advisors and their clients.

Watch the full episode of Focus On… to learn more.

Footnotes

[1] Morningstar Indexes, Unicorns and the Growth of Private Markets, accessed December 31, 2024, https://www.morningstar.com; MacroTrends, VIX Volatility Index - Historical Chart, accessed December 31, 2024, https://www.macrotrends.net.

[2] Disclaimer: The quotes in this blog have been edited for clarification and brevity. Any alterations made do not change the intended meaning of the original statements.

[3] Performance references the 15-year period ending 12/31/2023. Bonds reflect the Bloomberg Barclays US Aggregate Bond Index; Stocks reflect the MSCI ACWI Index; Private Credit reflects a 60/40 blend of the Cliffwater Direct Lending Index and Cambridge Associates indices for Control-oriented Distressed, Subordinated Capital, and Credit Opportunities; Private Equity reflects a 70/15/15 blend of Cambridge Associates US indices for Buyouts, Venture Capital, and Growth Equity.

[4] The Next $20 Trillion in Alternative Investments, Chronicles of an Allocator (CAIA), January 2024, accessed December 31, 2024, https://caia.org/content/january-2024-next-20-trillion-alternative-investments.