With many investors and their financial advisors bailing on alternative funds that invest in private loans, they are currently turning to other asset classes, including private equity and venture cap vehicles, as a way to diversify their portfolios, according to new research from fund tracker Morningstar Inc.
An analysis of financial advisors shifting away from semi-liquid funds that act essentially as mini-banks and provide financing for small- to mid-sized private companies is hardly a surprise; advisors, who sell high-risk, high-priced funds, have been selling back their shares of such companies this year in record numbers.
But the Morningstar report highlights the boom and bust cycle of alternative investments.
Nontraded real estate investment trusts were the rage before interest rates spiked in 2022; private credit funds then became the top selling investment until fears private loan funds exposure to loans of software companies, under attack from artificial intelligence, pushed advisors to redeem clients shares. Fears of companies defaulting on loans and filing for bankruptcy also contributed to the decline in sales of private credit funds.
“Semiliquid funds are approaching $600 billion in net assets as of the end of March 2026, more than double the amount at the end of 2022,” according to the Morningstar report, titled “The State of Semiliquid Funds 2026." The report also notes that private credit funds drove most of the growth but have fallen out of favor in 2026 as software exposure and credit quality concerns spurred redemption requests.
Financial advisors sell alternative investments to clients typically searching for yield and a way to diversify away from stock and bond funds and indexes. But alternative investments like nontraded business development companies – BDCs – and REITs are an expensive solution to a client’s portfolio dilemmas.
Such alternative or semiliquid funds cost significantly higher, on average, an expense ratio of 3%, than plain vanilla mutual funds or exchange-traded funds, according to Morningstar.
According to Morningstar, investors in the first quarter of the year pulled $1.8 billion from the 10 largest direct lending funds, including funds sponsored by Blackstone, Cliffwater and Blue Owl.
“Private credit fund demand began to slow in 2025's second half as concerns over software exposure and lower base rates cooled investors on the asset class,” according to the report. “In the first quarter of 2026, net assets for that Morningstar Category dipped by about $1 billion.”
Apparently, financial advisors and their clients are turning to alternative investment funds in order to get exposure to the red hot initial public offering – IPO – market.
“Interest in semiliquid venture capital funds has increased, owing to investor enthusiasm for popular companies like SpaceX, Anthropic, and OpenAI,” according to the report. “Assets in the category nearly tripled in 2025, and the trend continued in 2026's first quarter.”
“The private equity category also saw heightened demand as a wave of recently launched private placement semiliquid funds attracted inflows,” according to the report.
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Interval funds and other semi-liquid or illiquid products are typically two to three times more expensive than plain vanilla stock or bond mutual funds or exchange-traded funds.
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