Why Institutional Investors Are Doubling Down on Alternatives in a Shifting Market
March 20, 2025
As global financial markets grapple with volatility, inflation, and rising interest rates, institutional investors are increasingly turning to alternative investments—from hedge funds to private credit and real assets—to build more resilient, diversified portfolios.
This trend was front and center at the Asia Investment Conference 2024, where experts from UBS Asset Management1 discussed how the role of alternatives is evolving in today’s economic climate. Their message was clear: alternatives are no longer optional—they are essential.
From a Low-Yield World to an Inflation Era
Over the past two decades, alternative assets have grown in popularity, particularly among institutional investors and sovereign wealth funds. One major catalyst? The prolonged low interest rate environment that began after the 2008 global financial crisis.
Since the 2008 recession, financial analysts have noted three major trends2:
- Shift from direct to indirect investing
- Shift from active to passive investing
- Shift from public to private companies
Between 2009 and 2021, traditional fixed-income instruments offered minimal returns. Alternatives, in contrast, provided higher yields, a broader opportunity set, and—most importantly—low correlation with public markets. These benefits became increasingly attractive as investors searched for ways to meet long-term return targets.
But since 2021, everything has changed.
The end of the pandemic unleashed a surge in global inflation, prompting central banks across the U.S. and Europe to hike interest rates aggressively. Meanwhile, geopolitical instability—from the Russia-Ukraine war to conflict in the Middle East—has added layers of uncertainty. In this new world, traditional portfolio structures are being tested like never before.
When the 60/40 Portfolio Breaks Down
The classic 60/40 portfolio, which splits assets between equities and bonds, showed serious cracks in 2022. Instead of acting as a counterbalance to equities, bonds also delivered negative returns, upending a decades-old assumption about asset diversification. This breakdown has spurred many investors to ask: Where do we go from here?
For many, the answer lies in alternatives. Alternative assets come in a wide range of forms, each offering unique characteristics and potential benefits within a diversified investment portfolio. Below is an overview of the primary alternative asset types and what we expect from each going forward:
Private Equity and Venture Capital
These assets provide exposure to high-growth companies and emerging sectors, offering the potential for enhanced long-term returns. Private equity and venture capital are particularly attractive for investors seeking capital appreciation through ownership in private businesses. Looking ahead to 2025, we anticipate a resurgence in growth equity, driven by renewed demand for deal-making activity and a more favorable regulatory environment. As market conditions stabilize and investor confidence improves, the appetite for high-growth opportunities is expected to rebound.
Infrastructure
Infrastructure investments are valued for their ability to deliver stable, long-term cash flows, often backed by government contracts or essential service revenues. These assets can benefit significantly from public and private investment initiatives aimed at modernizing and securing infrastructure. In the current environment, we foresee robust demand for infrastructure, particularly in the U.S., where national priorities include energy independence, supply chain resilience, and the upgrading of transportation and utility networks.
Direct Lending
This asset class involves providing loans directly to businesses, often with attractive yields relative to traditional fixed income. Many direct lending strategies feature floating-rate structures, making them well-positioned to withstand or benefit from rising interest rates and inflation. We expect direct lending to remain resilient, supported by disciplined risk management and continued strong demand from borrowers who seek flexible financing solutions outside of traditional banking channels.
Hedge Funds
Hedge funds utilize a range of strategies, including long/short equity, global macro, and event-driven investing, to capitalize on market inefficiencies. Their ability to generate returns in both rising and falling markets makes them valuable tools for portfolio diversification. Given their flexible mandate and potential for low correlation with traditional asset classes, hedge funds can play a key role in managing downside risk during periods of volatility. Their adaptability allows them to navigate shifting macroeconomic and market conditions effectively.
Real Estate
Investing in real estate provides access to a tangible asset class that can generate income through rental yields and appreciate over time. Real estate also offers inflation protection, as both property values and rental rates tend to rise in inflationary environments. Whether through residential, commercial, or industrial properties, real estate remains a cornerstone of many alternative investment strategies, offering both income and long-term capital growth potential.
Source: JP Morgan3
Hedge Funds: Diversification When You Need It Most
One of the key characteristics of hedge funds is the ability to offer returns uncorrelated with the market levers. Given the current market situation where traditional fixed income may not deliver the protection, diversification of investments becomes an unavoidable imperative.
In the low-rate era, hedge funds struggled to keep up with rising equity markets unless they took on outsized risks. But today’s environment, which has volatility and uncertainty on interest rates, focuses is back on market dispersion, enabling hedge funds to capitalize on both winners and losers without pushing past their risk tolerance. This can potentially lead to a better balance of returns and risk, exactly when investors need it most.
Private Credit: A Quiet Powerhouse
While hedge funds offer agility, private credit delivers steady, risk-adjusted returns, especially appealing in a world where bank lending is shrinking.
Following the 2008 financial crisis, major banks pulled back from direct lending, opening the door for private lenders. Private equity firms then deepened the market by building in-house lending arms. Today, private credit is a mature ecosystem, offering access to non-traditional deals, illiquidity premiums, and tightly structured protections for investors. With only 2,600 public companies out of an approximate 17,000 with revenues of over US$ $ 100 M, the headroom for opportunity is massive.
Managing Liquidity in an Illiquid World
One historical challenge with alternatives has been illiquidity. Many private funds require long lock-up periods, which can be problematic for investors needing quick access to capital.
In response, Asset managers have introduced semi-liquid vehicles that strike a balance between long-term returns and periodic liquidity. These solutions are gaining traction, especially as liquidity premiums have increased in line with interest rates.
However, Caveat Emptor: higher liquidity often comes at the cost of lower returns or reduced exposure to high-quality assets.
Blending Public and Private for the Future
What is becoming increasingly clear is that blended portfolio construction—combining traditional public markets with thoughtfully selected alternatives—is the way forward. As the investment landscape evolves, so too must asset allocation strategies. Alternatives can no longer be viewed as niche or opportunistic. Instead, they are fast becoming a core pillar of long-term investment strategy, offering investors a way to meet their goals in a world defined by uncertainty. Whether it is hedge funds providing volatility mitigation or private credit unlocking exclusive opportunities, one thing is clear: alternatives are no longer niche; they have to be a part of every institutional investor’s strategy.