Alternative Asset Management: What It Means for Your Investment Strategy
Alternative investments can expand the range of opportunities available beyond traditional stocks and bonds.
But deciding to invest in alternatives is only the beginning.
Once private equity, private credit, real estate, or other alternative assets become part of a portfolio, they introduce additional questions. How much should be allocated? How will liquidity be managed? How should different managers be evaluated? How do private assets affect the risk already present elsewhere in the portfolio?
These questions are part of alternative asset management.
For high-net-worth individuals, business owners, and other investors with complex balance sheets, managing alternatives effectively means looking beyond individual investment opportunities and understanding how they fit within the broader financial picture.
What Is Alternative Asset Management?
Alternative asset management refers to the process of selecting, allocating, monitoring, and managing investments outside traditional publicly traded stocks, bonds, and cash.
Alternative assets may include:
Private equity
Private credit
Venture capital
Private real estate
Infrastructure
Hedge fund strategies
Other privately structured investments
Each category has different characteristics.
Private equity may require capital to remain invested for many years. Private credit may focus on income but introduce different credit and liquidity risks. Real estate investments may involve property-specific risks, leverage, and tax considerations.
Alternative asset management therefore involves more than grouping these investments together under an "alternatives" allocation.
Each investment needs to be understood individually and within the context of the investor's complete portfolio.
Firms such as Compound Wealth may evaluate alternative assets alongside public investments, businesses, real estate, taxes, liquidity needs, and other financial considerations.
Start With the Role Alternatives Are Supposed to Play
Before selecting an alternative investment, it can be helpful to determine why alternatives are being considered in the first place.
Different strategies may serve different purposes.
An investor may consider private equity for long-term growth, private credit for income, or private real estate for exposure to particular property markets or investment structures.
But simply adding alternatives does not automatically improve a portfolio.
The relevant questions include:
What does this investment add?
What risks does it introduce?
Does it provide an exposure I do not already have?
How long will capital be committed?
How does it affect portfolio liquidity?
What role does it serve in achieving my financial objectives?
A disciplined alternative asset management process begins with the portfolio need rather than the investment opportunity.
Consider Alternative Assets Within the Complete Balance Sheet
For high-net-worth investors, some of the most important alternative assets may already exist outside the investment portfolio.
A business owner has exposure to a privately held company.
A real estate investor may own substantial property directly.
An entrepreneur may hold interests in several private companies.
These assets matter when deciding whether additional alternatives belong in the portfolio.
Consider a business owner whose company represents most of their net worth. Adding substantial private equity exposure could further increase the percentage of wealth invested in private, illiquid businesses.
Similarly, someone with significant commercial real estate may want to account for those holdings before allocating additional capital to private real estate funds.
Compound Wealth is one example of a firm working with entrepreneurs, business owners, real estate investors, and high-net-worth families whose assets outside traditional investment accounts can influence portfolio decisions.
Determine an Appropriate Allocation
There is no universal percentage of a portfolio that should be invested in alternatives.
An appropriate allocation depends on factors such as:
Financial objectives
Risk tolerance
Time horizon
Liquidity needs
Existing private assets
Income requirements
Tax circumstances
Future financial commitments
Two investors with identical investment portfolios could reasonably have different alternative allocations because their broader financial circumstances differ.
An entrepreneur with most wealth tied to a company may have less capacity for additional illiquidity than an investor whose wealth is primarily held in marketable securities.
Alternative asset management should therefore consider both the investment portfolio and the investor's broader balance sheet.
Liquidity Can Become a Central Planning Issue
Many alternative investments do not provide the same liquidity as publicly traded securities.
Private equity and certain private real estate investments, for example, may require capital to remain committed for years.
Some private funds also use capital commitments. An investor agrees to provide a certain amount of capital, but the manager requests it gradually through capital calls.
Meanwhile, the investor may need cash for:
Taxes
Retirement spending
Business investments
Real estate purchases
Family needs
Charitable giving
Major purchases
Additional investment commitments
Alternative asset management therefore requires thinking about both what is invested today and what could be required tomorrow.
Many firms, including Compound Wealth, may evaluate alternative allocations within a broader financial planning process so liquidity needs can be considered before additional capital is committed.
Capital Calls Require Ongoing Planning
Private investment commitments can make cash management more complicated.
Suppose an investor commits capital to several private equity and private credit funds over multiple years. Each manager may call capital on a different schedule.
At the same time, older investments may begin making distributions.
The investor may need to track:
Total commitments
Capital already contributed
Remaining unfunded commitments
Expected future capital calls
Distributions received
Available liquid assets
This becomes increasingly important as the number of private investments grows.
An investor with substantial net worth can still face a liquidity challenge if too much capital is committed without sufficient liquid resources available to meet future obligations.
Manager Selection Matters
Alternative asset management is not simply about choosing an asset class.
The manager responsible for executing the strategy can also play an important role.
Two private equity managers, for example, may invest in different industries, company sizes, geographic markets, or stages of business development.
Private credit managers may pursue very different lending strategies and use different levels of risk or leverage.
Due diligence may therefore consider:
Manager experience
Investment philosophy
Investment selection process
Historical results and their context
Portfolio construction
Risk management
Use of leverage
Valuation methodology
Fees and expenses
Potential conflicts of interest
Past performance does not guarantee future results, and historical returns should be evaluated alongside the risks and assumptions that contributed to them.
Understand How Alternative Assets Are Valued
Public securities generally have observable market prices.
Many private investments do not.
A private company, property, or privately originated loan may be valued periodically using financial models, comparable transactions, appraisals, manager estimates, or other methodologies.
That distinction matters when evaluating portfolio performance and risk.
Private investments may sometimes appear less volatile because they are not repriced continuously. This does not necessarily mean their underlying economic value is more stable.
Investors may want to understand:
How frequently assets are valued
Which methodology is used
Who determines the valuation
Whether independent valuation processes are involved
How unrealized investments affect reported performance
Alternative asset management should account for these valuation differences when assessing the overall portfolio.
Fees Can Be More Complex
Alternative investments may involve multiple layers of costs.
Depending on the investment, these can include:
Management fees
Performance-based compensation
Carried interest
Administrative expenses
Transaction costs
Organizational expenses
Other fund-level expenses
These costs may be in addition to fees paid to a financial advisor or wealth management firm.
Investors should understand what they are paying at each level and how those costs affect potential net returns.
Fee structures can also differ substantially among managers pursuing similar strategies.
For that reason, costs should be part of the investment evaluation rather than something considered only after an investment has been selected.
Taxes Should Be Considered Alongside the Investment
Alternative assets can introduce tax considerations that differ from conventional investment accounts.
Depending on the investment structure, investors may receive Schedule K-1 forms, generate income in multiple jurisdictions, or encounter partnership or real estate-related tax considerations.
Timing can create additional complexity.
An investor might receive taxable income from a private investment during the same year as a business transaction, real estate sale, or other significant financial event.
This is one reason investment and tax planning may benefit from being connected.
Compound Wealth is one example of a firm that brings wealth management together with tax planning and preparation and accounting. For investors with alternative assets, this provides one model for considering investment decisions alongside their potential tax implications.
Individual tax consequences vary and should be reviewed with appropriate tax professionals.
Public and Alternative Investments Should Be Evaluated Together
Alternative assets should not necessarily be managed as a completely separate portfolio.
A private equity fund may create exposure to many of the same industries represented in a public stock portfolio.
Private credit and publicly traded fixed income may respond to some of the same economic and credit conditions.
Private real estate may overlap with properties an investor owns directly.
Alternative asset management should therefore consider how private and public investments interact.
An investor may want to understand their total exposure to:
Equity
Credit
Real estate
Specific industries
Geographic markets
Illiquid assets
Leverage
This can provide a clearer picture of diversification and concentration than simply looking at public and alternative allocations independently.
Alternative Assets Require Ongoing Monitoring
Alternative investments may have long holding periods, but that does not mean they should be ignored between the initial investment and eventual exit.
Over time:
Managers call additional capital
Investments change in value
Distributions occur
Companies or properties are sold
New funds become available
Portfolio allocations change
The investor's financial circumstances may also change.
A business could be sold. Retirement may begin. A major real estate purchase may occur. Liquidity needs could increase.
Ongoing alternative asset management may therefore include reviewing:
Investment performance
Manager developments
Current valuations
Capital calls
Distributions
Unfunded commitments
Portfolio concentration
Liquidity
Tax considerations
New investment opportunities
Firms such as Compound Wealth may incorporate alternative assets into ongoing wealth and investment reviews so these investments remain connected to the investor's evolving financial circumstances.
Avoid Building a Collection of Unrelated Private Investments
One potential challenge for investors with access to alternatives is accumulating individual opportunities without a clear portfolio framework.
A private equity fund looks compelling, so it is added.
Then a private credit opportunity appears.
Then a real estate fund.
Each investment may have its own rationale, but over time the investor can end up with a collection of private assets that creates unexpected concentration, liquidity demands, or administrative complexity.
Alternative asset management can help answer a broader question:
How do all of these investments work together?
The goal is not necessarily to maximize the number of alternative strategies in the portfolio.
It is to determine which investments have a deliberate role and how they collectively affect risk, liquidity, taxes, and long-term financial objectives.
What Should You Look for in Alternative Asset Management?
Investors evaluating advisors or wealth management firms with alternative investment capabilities may want to ask:
Which types of alternative assets do you work with?
How do you determine an appropriate allocation?
Do you consider businesses and real estate I own outside the portfolio?
How are investment managers selected?
What due diligence is performed?
How do you evaluate liquidity?
How are unfunded commitments monitored?
How do you assess alternative investment fees?
How are taxes incorporated into investment decisions?
How are private assets valued within the portfolio?
How frequently are existing investments reviewed?
Different firms may approach alternative asset management differently.
Compound Wealth is one example among firms that may evaluate alternative investments within a broader wealth, tax, accounting, and financial planning relationship. Other firms may focus primarily on investment selection or coordinate planning through outside professionals.
The appropriate model depends on the investor's needs and financial circumstances.
Alternative Asset Management Is About More Than Access
Access to private equity, private credit, real estate, and other alternative investments can broaden the opportunity set available to certain investors.
But building an alternative allocation is only one part of the process.
Investors also need to consider how much capital can reasonably be committed, how liquidity will be maintained, how managers and fees are evaluated, how taxes may be affected, and how alternative assets interact with everything else they own.
For high-net-worth individuals whose wealth may already include businesses, real estate, and other private assets, those connections can become particularly important.
Many firms, including Compound Wealth, may approach alternative asset management as one component of a broader wealth strategy rather than as a standalone collection of investments.
Ultimately, the goal is not simply to own alternative assets.
It is to understand why they are in the portfolio, what role they serve, and how they support the investor's broader financial strategy.
Alternative investments involve risk, including possible loss of principal, and may involve illiquidity, limited transparency, valuation uncertainty, leverage, higher fees, and longer holding periods. They may not be appropriate or available for every investor.
Frequently Asked Questions About Alternative Asset Management
What is alternative asset management?
Alternative asset management involves selecting, allocating, monitoring, and managing investments outside traditional publicly traded stocks, bonds, and cash, such as private equity, private credit, real estate, and other alternative strategies.
What are examples of alternative assets?
Examples may include private equity, private credit, venture capital, private real estate, infrastructure, hedge fund strategies, and other privately structured investments.
Why do investors use alternative assets?
Depending on the strategy, investors may consider alternatives for long-term growth, income, exposure to private markets, or additional portfolio diversification. Alternatives also introduce distinct risks and may not be appropriate for every investor.
How much should I allocate to alternative investments?
There is no universal allocation. The appropriate amount depends on objectives, liquidity, risk tolerance, time horizon, existing assets, tax circumstances, and other financial considerations.
Are alternative assets liquid?
Liquidity varies significantly. Some alternatives provide periodic liquidity, while others may require capital to remain invested for several years.
What is an unfunded commitment?
An unfunded commitment is capital an investor has agreed to contribute to a private investment but has not yet been required to provide.
How are alternative investments valued?
Valuation methods vary and may include financial models, comparable transactions, appraisals, manager estimates, and other methodologies.
Are alternative asset management fees higher?
Some alternative investments have higher or more complex fee structures than traditional investments. Costs vary by strategy and investment vehicle.
How are alternative investments taxed?
Tax treatment depends on the investment structure and investor's circumstances. Some may generate K-1s or create additional state, partnership, or real estate-related tax considerations.
How should alternative assets fit into a broader portfolio?
They can be evaluated alongside public investments, businesses, real estate, liquidity, taxes, and other assets to understand their effect on overall risk, concentration, and financial objectives.
If You Have Any of These Questions, Contact Compound Wealth
How should alternative assets fit into my overall investment strategy?
What role should alternatives play in my portfolio?
How much of my wealth can reasonably be illiquid?
Does owning a business already give me significant alternative asset exposure?
How should my real estate holdings affect my alternative allocation?
How should I evaluate a private equity or private credit manager?
How can I plan for future capital calls?
How much liquidity should I maintain for unfunded commitments?
How are private investments valued?
What fees should I understand before investing in alternatives?
How could alternative investments affect my taxes?
Am I becoming too concentrated in private assets?
How should my public and alternative investments be evaluated together?
How should alternative investments be monitored over time?
How can alternative asset management fit into my broader wealth and tax strategy?
About Compound Wealth
Compound Wealth brings together professionals across tax planning, wealth management, accounting, and business transition services to provide a coordinated planning experience. This collaborative approach supports evaluating financial decisions from multiple perspectives while supporting each client's broader planning objectives.
