Advisors pile into alternatives, but liquidity fears limit appetite

Alternative investments have moved from the fringes to the mainstream of the advisory business, according to new survey research.

A joint survey by CION Investments, YCharts and Compound Insights found that 95% of advisors now incorporate alternatives into client portfolios. That includes 61% of all respondents saying they use evergreen vehicles and interval funds across a large share of accounts, and half reporting use of liquid alternative ETFs.

The findings of the CION report offer a critical marker for those seeking to democratize access to non-traditional asset classes once reserved almost exclusively for institutions and the ultra-affluent.

"For decades, many alternative investment strategies were largely reserved for institutional investors and the ultra-high-net-worth investor class," said Michael A. Reisner, co-founder and co-CEO of CION Investments.

"As access continues to expand, advisors have an opportunity, perhaps even a responsibility, to help clients understand the role these investments may play within a broader portfolio as well as the trade-offs that come with them," Reisner said.

Compound Insights, which conducted the research through The Compound Media and is affiliated with Ritholtz Wealth Management, framed the results as evidence of a maturing but still cautiously optimistic market.

"Advisors are expanding their use of alternatives, but they're also clear-eyed about the considerations that come with them," said Callie Cox, chief strategist at Compound Insights and chief market strategist at Ritholtz. "That tension between opportunity and practicality may be one of the defining themes shaping adoption going forward."

Where advisors are putting new money

Asked which alternatives they want to use more but haven't yet implemented at scale, 52% of advisors pointed to infrastructure and real assets, 46% to private equity and 36% to private credit – with smaller shares eyeing crypto-related exposure (28%) and structured strategies (22%). Eighteen percent said they had no interest in expanding further.

"Real estate and infrastructure are well-known, tangible investments. Business investment is soaring, and data center financing has become a popular way to gain exposure to the AI theme," the report noted, commenting on the apparent bias toward real assets. 

Read more: Real assets gain appeal amid inflation, rates

"Private equity and private credit are newer, more abstract concepts for a wealth management portfolio. However, they are becoming an important part of our economy: the swath of businesses that can’t, or choose not to, fundraise through traditional channels," the report said.

The survey coincided with a period of heightened scrutiny for private equity and private credit specifically, as negative headlines on individual deals drew outsized media attention. Liquidity concerns were the most commonly cited obstacle to broader adoption overall, named by 61% of those surveyed, which squares with recent high-profile stories of private credit funds enforcing redemption limits amid heightened requests from investors.

Read more: Apollo throttles withdrawals from $26B private credit fund after exit requests rise to 17%

A market advisors are still learning to navigate

Another report from ISS Market Intelligence last month noted that private credit remains the most widely held alternative, with 60% of advisors invested. But momentum has cooled sharply: only 23% now plan to raise their allocations over the next year, down from 64% at the end of 2024. Infrastructure has moved the opposite direction, with 73% of advisors expecting to add exposure, up from 68% in 2024.

Apart from a wave of negative headlines around bankruptcies, ISS MI researchers, Alan Hess and Antara Maity attributed cooling private-credit sentiment to competitive pressure some lenders face from artificial intelligence, alongside investor pushback against redemption gates on funds under strain.

Read more: Private credit is having its Big Boy moment, according to Morgan Stanley’s CEO

ISS MI found that 65% of advisors named illiquidity among their top three barriers to using more alternatives. It also revealed a clear preference for semi-liquid structures, such as interval funds and business development companies, which 39% of advisors named as their preferred access point, compared with 25% who favored traditional limited partnerships.

The CION report offers advisors six practical steps for managing that tension:

• Agreeing on a common definition of alternatives within their firm;
• Articulating a clear allocation strategy;
• Understanding the tradeoffs between liquidity and transparency;
• Investing in due diligence;
• Communicating proactively with clients; and
• Resisting a one-size-fits-all approach to recommendations.

"In the end, the question for advisors isn’t whether alternatives are worth allocating to," the CION report emphasized. "Rather, t's how they can enhance a portfolio, and what tradeoffs clients are willing to accept."