How much is too much when it comes to alternatives? Advisors say: 'It varies'

There’s a certain peculiarity - call it irony if you want - on Wall Street that investors pay more in fees to own alternatives, but receive less liquidity in return.

Of course, there are also expectations for higher returns and superior management, so perhaps it’s not that much of a paradox for investors to lock up their money for longer periods in private market assets if the payoff is potentially worth it.

Still, in this post 60/40 world where plain old publicly traded stocks and bonds do not an allocation make, the topic of liquidity rises with each percentage point of private market assets added to a client’s portfolio. And that means wealth managers need to weigh their alternatives – literally, figuratively and financially – with great care.    

Noah Damsky, principal at Marina Wealth Advisors, believes investors can easily have 50% of their portfolio in alternatives if no income is needed. He notes, however, that the appropriate percentage can vary dramatically depending on the liquidity of the underlying investments, underlying investment risks, and the personal needs of the investor.

“I have seen high net worth individuals, who do not need access to the funds in their portfolio, invest 20% to 30% in illiquid alternative investments,” Damsky said.

Dory Wiley, CEO of Commerce Street Holdings, agrees, saying that with “no liquidity needs and a long term outlook,” he has “no problem with 40% to 50% allocations, if done correctly.”

Ed Cofrancesco, CEO of International Assets Advisory, recommends a minimum of 10% of a portfolio in alternatives, assuming the investor is accredited, and up to 20% if they have extensive experience in using such financial vehicles.

“The big issue for me is how alternative Investments are layered with fees and are overly complicated as well as the interest of ultimate manager of the investment is not aligned with the investors. I have seen this too many times and is the greatest reason why alt Investments fail the investor,” Cofrancesco said. He added that “simple is better” and regular credible third-party pricing of the investments are necessary. 

Cash flow requirements

Moving on, Andrew Mescon, chief executive officer at Ballast Rock Private Wealth, maintains that individual cash-flow requirements are a key consideration when evaluating certain types of alternatives, although “evergreen” funds have somewhat tried to address these issues with modified quarterly liquidation windows. Right now, Mescon said it has become increasingly common for him to see clients allocating 20% to 40% of their assets in alternatives.

“To be clear, this range is observational only, and by no means reflects our intention to establish a standard baseline allocation towards alternatives. While the industry’s thinking on this matter continues to evolve, we anticipate maintaining an approach to alternative investing that's focused on providing custom solutions based on each investor's unique preferences and circumstances,” Mescon said. 

Picking a top private market asset

When it comes to selecting his favorite alternative products, Marina Wealth’s Damsky prefers smaller opportunities that are not flooded with capital. For example, he finds managers like Hyperlink Ventures that “combine a narrow focus and a unique edge” offering some of the most attractive opportunities in the market.

Elsewhere, Cofrancesco is a fan of non-public single purpose real estate projects, calling them “pretty straight forward and easily understood investment that both the investor and their financial advisor can understand and thoroughly vet.” And the simpler, the better, in his opinion.

“The objective should be very clear and discernible,” said Cofrancesco. “For example, buying a property, getting in entitled for the type of project, such as muti-family housing or shopping center, securing financing, building and completing the project, securing tenants for the property, and finally selling the property,” he said.

Over at Ballast Rock Private Wealth, Mescon continues to favor private credit for income generation and private equity secondaries for long-term capital appreciation. Within private credit, direct lending and asset-backed lending strategies remain particularly attractive, consistently outperforming their public market counterparts, such as corporate and high-yield bonds, according to Mescon.

“These private funds offer broad diversification across borrowers and industry sectors, while robust financial covenants provide downside protection that is often absent in similar publicly syndicated loans,” Mescon said.

The private equity secondary market also presents compelling opportunities, said Mescon, particularly as distributions from traditional buyout funds remain below historical norms. Furthermore, many high-quality, mature assets are still held in older vintage funds approaching their term limits, creating a steady pipeline of attractive secondary transactions.

“Purchasing these mature assets at discounts to net asset value helps mitigate the traditional ‘J-curve’ effect associated with traditional buyout private equity funds. Additionally, the growth of evergreen fund structures has made allocating to secondaries far more accessible and investor-friendly compared to traditional drawdown structures,” Mescon said.