Why More Plan Administrators Are Turning to Alternative Investments and What It Means for You

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A growing share of retirement plans are looking to embrace investments once reserved for Wall Street and the über-wealthy. A new BlackRock survey found that nearly one in four plan administrators are considering adding alternative assets—like private equity and private credit—within the next year, with target-date funds the most likely to incorporate them. This shift stems from two significant forces: the slowing of return expectations for traditional stocks and bonds, and a growing conviction that alternatives—comprising everything from real estate to private credit—can offer diversification in volatile markets.

For retirement savers, this shift could have major implications. Alternatives are no longer just a niche play for endowments or hedge funds but increasingly part of the mainstream menu of investment options. But what exactly are alternative investments, and why are they in such demand?

Alternative Investments and Diversification

Massive changes are afoot in this part of the market, not least because financial engineers, fund managers, and retirement plan administrators have found ways to offer the public access to these so-called alternative markets, making it increasingly difficult to label them as alternative, much like a 1990s Seattle band. Anything other than stocks, bonds, and cash is considered an alternative asset, from private equity and real estate to infrastructure, hedge funds, private credit, and commodities. The market size reached $18.9 trillion in 2024, and is expected to grow 7.9% annually until 2032.

The appeal of alternative assets has traditionally been to diversify a portfolio and lower risk by spreading investments across assets that respond differently to different market conditions. This benefit can be measured through correlation coefficients, statistical measures showing how assets move in relation to each other. For example, in the chart below, commodities have a low correlation with the S&P 500 index, while hedge funds have a very low correlation with bonds.

The performance of large-cap equities had been remarkably strong until the mid-2020s, with average annual returns for the S&P 500 of 14.5%, 10.2%, and 8.1% over five, 10, and 20 years, respectively (as of May 2025). However, Goldman Sachs (GS) analysts were not alone in late 2024 when they predicted far more modest gains for the S&P 500 ahead. They estimated 3% annually over the next decade—and that was before the economic slowdown and market turmoil of early 2025. This gives investors a second major reason to seek out alternatives.

Who Can Invest in Alternatives

Until recently, access to alternatives was mostly limited to accredited investors and large institutions. Now, with sponsored retirement plans—those are the ones you get through your job—starting to include them, the door is opening wider for everyday savers.

In addition, while accredited investors—those meeting certain criteria regarding income, net worth, and experience with investing— still have the broadest range of choices, it’s become far easier for retail investors to gain access through the avenues found in the table below:

The Performance of the Major Alternative Investments

Industry analysts expect private credit, real estate, and infrastructure funds to be the most likely candidates for sponsored retirement plans, as they can be packaged into diversified vehicles, such as target-date funds, and provide income or inflation protection. For plan administrators weighing these options and for savers who may soon see them show up inside their 401(k) target-date funds or are interested in them for separate retirement accounts, here’s how the most common alternative asset classes have performed under different market conditions.

1. Private Equity

Private equity (PE) has historically delivered among the strongest returns among alternative asset classes. The performance of these investments tends to exhibit a distinct “J-curve” pattern, with negative returns in early years followed by stronger returns in later years as investments mature. During recessions, PE typically sees significant drawdowns, but their dips aren’t as severe as the major stock indexes and, historically, they recover faster.

Below is a comparison of public and private equities. Because definitions and data for these investments vary significantly, we’ve chosen a more conservative estimate of PE returns, though most show about a 3%-5% “illiquidity premium” (the extra bump over similar highly liquid public market investments for the far longer periods PE investments require your money to stay put).

Investors can access the returns for private equity firms through the public markets, though they have performed less well, at least as measured by the S&P 500 Private Equity Index.

2. Real Estate and REITs

Core real estate has delivered annualized returns of about 7% over the past decade, with significantly less volatility than public REITs. This figure comes down, of course, when adjusting for inflation, where we calculate real estate has grown as follows (all data, unless otherwise noted, are up to and as of the beginning of 2025 for comparison purposes, using the U.S. Bureau of Labor Statistics’ consumer price index for inflation and data from the U.S. Federal Reserve of St. Louis, Trading View, NAREIT, and other sources we cite):

• CAGR since the housing market bottom in 2011: 6.3%
• CAGR since the end of the Great Recession: 2.9%
• CAGR since the end of the short pandemic recession: 4.0%

As the above suggests, real estate tends to adjust well with inflation, even as it often takes a hit during recessions. For example, between the recessions that opened and closed the 1970s, a period of stagflation, we calculate a 3.2% CAGR (adjusted for inflation).

For easier access to the real estate market, there are real estate investment trusts (REITs) and ETFs with similar holdings. These firms own, operate, or finance income-producing real estate across property sectors. They’re required to distribute at least 90% of their taxable income to shareholders as dividends. Historically, REIT income and price appreciation have contributed about equally to their returns.

Most importantly here, REITs greatly outperform direct real estate purchases, but their volatility is not for the faint of heart: In 2008, REIT indexes dropped 35% to 40% (compared with about 20% for residential and commercial real estate). In 2022, the FTSE Nareit All Equity REITs Index returned 24.9%, while both commercial and residential real estate were up.

3. Hedge Funds

Hedge fund performance varies according to the strategies used. Overall, we calculate, using data from Hedge Fund Research Inc., a CAGR from 2005 to the beginning of 2025 of 3.71% for the HFRI 500 Fund Weighted Composite Index, a global, equal-weighted benchmark that tracks the performance of 500 hedge funds across all strategies and regions. For the HFRI Fund of Funds Index, which tracks major hedge funds that invest in other hedge funds, we obtain an annualized return of 3.32% for the same period.

If you want access to the returns of hedge funds through your regular brokerage account, there are ETFs that aim to mirror their performance, including the ProShares Hedge Replication ETF (HDG).

4. Private Credit

Private credit, also known as private debt, has grown substantially as an asset class over the past decade, filling the gap left by banks that reduced their lending following the 2008 financial crisis. That said, the size of the global debt market is vast, so it still accounts for only 1.5% of the total.

Over the past 20 years, private credit funds have consistently generated annualized returns in the high single digits to low double digits. The performance of private credit has often been significantly less volatile than that of public high-yield bonds due to several structural advantages. Loans are typically floating-rate, providing protection during rising interest rate environments, such as in 2022 to 2023, when private credit significantly outperformed fixed-rate public bonds. During this period, private credit funds delivered returns of 6% to 12%, while public high-yield bonds produced negative returns.

Interval Funds, Tender Offer Funds, and BDCs

For retail investors looking to tap into the attractive yields of private credit without the high minimums of traditional private funds, interval and tender offer funds have emerged as popular access points through financial advisors, wealth managers, or, increasingly, brokerage platforms like Schwab and Fidelity.

Interval funds are closed-end funds that let you cash out at fixed, pre-scheduled times (like every three, six, or 12 months), while tender offer funds let you cash out when the fund managers decide to offer buybacks (there’s no guaranteed schedule).

BDCs are part of this mix since they invest primarily in the debt—often senior secured loans—of middle-market companies that are typically below investment grade and not served by traditional banks. Their performance closely tracks trends in private credit, and historical data shows that well-managed BDCs have delivered returns in line with private debt funds. BDCs must distribute at least 90% of their taxable income as dividends, resulting in yields often ranging from 8% to 15%. Ares Capital (ARCC), the largest BDC with a $15 billion market cap, had a 9.5% yield as of May 2025.

5. Cryptocurrencies

Cryptocurrencies have been extremely volatile since first gaining widespread attention in the middle 2010s. Bitcoin, the largest cryptocurrency, has had a CAGR of 31.3% between the approval of bitcoin futures ETFs in December 2017 and the beginning of 2025, with a 67.3% CAGR for the same period since 2020. However, bitcoin and other cryptocurrencies have had periods of significant declines, such as the 65.1% drop in value in 2022.

In addition, contrary to the widespread assumption that crypto would perform well as a safe haven in the event of problems with stocks or the U.S. dollar, on days of significant market losses, such as in April 2025, crypto has also dropped significantly, our review of TradingView data shows.

6. Commodities

Commodities have historically delivered modest long-term returns of 3% to 5% annually, although once oil prices are factored in, this volatility increases significantly. Commodities exhibit a low positive correlation with the S&P 500, at about 0.40 (see chart on this page). However, this correlation varies significantly, with energy prices often declining as demand slows during recessions.

Gold has maintained its status as a store of value over millennia, delivering annual returns of about 8.3% since the end of the gold standard in 1971.

7. Collectibles

Collectibles—including fine art, rare wines, classic cars, and watches—have delivered competitive returns but with significant idiosyncratic risk and liquidity issues. During inflationary periods, certain collectibles—particularly those with scarcity value like blue-chip art and rare coins—have generally maintained their purchasing power. The primary drawbacks include high transaction costs (often up to 25%), real difficulties getting accurate valuations, and problems selling them during market stress.

In just about any neighborhood, someone has flooded out their living space with “one-day-they’ll-be-valuable” tchotchkes, but let’s stick to the part of the market where better data is available:

• Fine art: The Sotheby’s Mei Moses Art Index indicates that fine art has returned about 8.5% annually from 1950 to the early 2020s, although with extended periods of negative returns.
• Fine wine: Rare wine, tracked by the Liv-Ex Fine Wine 1000, has returned 8%-10% annually since the index began, but with lower volatility than art.
• Gems, watches, and rare coins: We can use import prices collected by the U.S. Bureau of Labor Statistics (BLS) as a proxy for these and other collectibles with an international market (see chart below). Between 2000 and the beginning of 2025, the BLS’s index had a CAGR of about 4.4%.

The Bottom Line

With nearly a quarter of retirement plans preparing to add alternatives, what was once a niche investment type is moving into the mainstream of retirement saving. That gives you new ways to diversify—whether through private equity, real estate, or private credit—but also new risks to weigh as complex assets enter everyday portfolios and your retirement plan.