Definition
Alternative investments are asset classes outside the traditional mix of public stocks, bonds, and cash equivalents. The category includes private equity, hedge funds, real estate, private credit, commodities, infrastructure, and collectibles. Alternatives typically offer higher return potential, lower correlation with public markets, and access to strategies unavailable through standard brokerage accounts.
How It Works
Traditional portfolios built on the 60/40 stocks-and-bonds model were designed for a different era. Billionaire family offices and institutional investors have moved well beyond this allocation. Research on ultra-high-net-worth family offices shows they allocate 50-70% of their portfolios to alternative investments, compared to the 5-15% allocation found in most standard financial plans.
Alternatives provide three primary benefits. First, return enhancement: many alternative strategies have historically outperformed public markets over long time horizons, particularly private equity and private credit. Second, diversification: alternatives often move independently of public markets, reducing overall portfolio volatility. Third, access to inefficiency: private markets are less efficient than public markets, creating opportunities for skilled managers to generate excess returns.
The trade-off is reduced liquidity. Most alternative investments require capital commitments of 3-10 years. Investors cannot sell on a whim the way they sell public stocks. This illiquidity premium is part of why alternatives generate higher returns: investors are compensated for giving up flexibility.
Every alternative investment should be evaluated through the CLERIC framework before committing capital. The six dimensions (Concentration, Liquidity, Experience, Risk, Investment Return, and Cost) prevent entrepreneurs from chasing projected returns without understanding the full picture.
When Entrepreneurs Use This
- Post-liquidity event: After selling a business or receiving a large distribution, entrepreneurs need to deploy capital beyond public markets to maintain growth
- Diversifying away from the business: The Two Bucket Approach directs capital into Bucket 2, where alternatives play a significant role
- Seeking uncorrelated returns: When public markets are volatile, alternatives can provide stability through different return drivers
- Accessing institutional-grade opportunities: Through a Fractional Family Office®, entrepreneurs gain access to institutional-quality funds typically reserved for endowments and pension plans
- Tax-advantaged structures: Certain alternatives (real estate, opportunity zones) offer tax benefits unavailable in public markets
Dew Wealth Perspective
Most financial advisors limit alternative allocations to a small sleeve of a traditional portfolio because they lack access to institutional-quality managers or the expertise to evaluate them. The Linchpin Partner model addresses both gaps: Dew Wealth maintains relationships with vetted fund managers and applies the CLERIC framework to every opportunity before presenting it to clients.
The goal is not to replace traditional investments entirely but to shift the allocation toward the model used by the world's most successful investors. The Billionaire Investment Allocation model provides the target allocation, while the Billionaire Allocation Glidepath maps the year-by-year transition from a traditional portfolio.