Alternative assets are increasingly considered a critical component of long-term investment plans. Here we explore how non-traditional investments—such as real estate, venture capital, and hedge funds—can provide investors with several benefits, including opportunities to achieve greater portfolio diversification and improve risk-adjusted returns.
Alternatives Can Enhance Portfolio Diversification
By spreading investments across multiple asset classes and types, diversification helps investors reduce risk without diminishing returns. Diversification decreases volatility and mitigates losses from any one investment—meaning diversified portfolios are better positioned to handle the inevitable swings within the market than highly concentrated portfolios.
Today, the resilience created by diversification is more important than ever amid a market characterized by volatility and uncertainty surrounding inflation, interest rates, and geopolitical events.
Correlation and Diversification
In his seminal 1952 work, American economist Harry Markowitz pioneered the concept that a portfolio’s risk and return characteristics aren’t solely determined by the sum of its individual components; the way portfolio holdings interact with each other also matters.
Correlation is a statistic that studies this interaction by measuring the degree to which two financial variables move in relation to each other. If the two variables have historically moved in opposite directions, then they are negatively correlated. If they move in the same direction, then they have a positive correlation. Correlation coefficients range from -1.0 to 1.0.
Investing in assets with little or no correlation to each other can boost portfolio diversification and reduce portfolio risk. The lower the correlation is between two investments, the greater the benefit of diversification.
Many alternative investments have low correlations to traditional asset classes, as shown below. For example, the correlation coefficient between global equities and private US core real estate was 0.0 over the 2008 – 2024 period, meaning the movements of the two asset classes showed no relationship at all.
In contrast, investors may struggle to achieve diversification within the bounds of a traditional 60/40 portfolio. When looking at the rolling 12-month correlation between the S&P 500 Index and the 10-year U.S. Treasury note, we see the negative stock-bond correlation experienced between 2000 to 2020 may not always be the case—the negative relationship was likely a reflection of the unusually low inflation and interest rate environment. Today, as the stock-bond correlation moves back into positive territory, advisors may need to look beyond traditional markets to enhance diversification in their clients’ portfolios.
Source: Bloomberg, Haver Analytics, FactSet, LSEG, Standard & Poor’s, J.P. Morgan Asset Management. *As of November 30, 2024.
Alternatives Can Improve Risk-Adjusted Portfolio Returns
Diversifying a portfolio of stocks and bonds by adding a blend of alternative assets can reduce volatility and improve returns. As shown below, a portfolio with 60% equities and 40% bonds posted annualized volatility of 9.7% and annualized returns of 8.7% during the period 1990 – November 30, 2024. By moving the portfolio to 40% equities, 30% bonds, and 30% alternatives (a diversified sleeve of real estate, private equity, and hedge funds), the portfolio’s annualized volatility declined to 7.9% and annualized returns rose to 9.1%.
Recognizing the Performance Benefits of Alternative Assets
Research by KKR calls attention to the illiquidity premium present in many private alternative asset classes, which can create excess returns in private alternatives relative to corresponding public benchmarks. The team attributes these historical excess returns to thoughtful asset selection, operational improvement, and timing of entry and exit when compared to public markets.1
Institutional and Individual Investor Positioning
Given the benefits outlined above, it is no surprise that the world’s largest and most well-resourced investors have embraced alternative assets. As shown below, institutional investors currently allocate roughly 20% of their portfolios to alternative asset classes, with real estate, hedge funds, and private equity leading the way. Individual investors are also increasing their exposure to alternatives: individuals with more than $5 million in investable assets grew their alternatives allocations from less than 8% in 2020 to an estimated 9.6% in 2024, as cited by KKR.2
Source: Preqin, J.P. Morgan Asset Management. Data sourced from Preqin’s 2024 Institutional Allocation Study. Simple average allocation is calculated using data across 4,255 investors representing $21.1tn in AUM.
Caliber’s Advisor Resource Hub
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1 KKR Insights, “An Alternative Perspective: Past, Present, and Future” September 2024, https://www.kkr.com/insights/alternative-perspective-past-present-future
2 Ibid.
About Caliber (CaliberCos Inc.) (NASDAQ: CWD)
Caliber (Nasdaq: CWD) is a diversified alternative asset manager with over $2.9 billion in Managed Assets. For more than 16 years, Caliber has delivered value across market cycles with its private equity real estate investment platform, specializing in hospitality, multi-family residential, and industrial real estate. In 2025, Caliber launched a Digital Asset Treasury strategy anchored in Chainlink (LINK). This initiative bridges real and digital asset investing, offering investors access through both publicly traded equity (Nasdaq: CWD) and Caliber’s private equity real estate funds.
Investor Considerations
The information contained herein is general in nature and is not intended, and should not be construed, as accounting, financial, investment, legal, or tax advice, or opinion, in each instance provided by Caliber or any of its affiliates, agents, or representatives. The reader is cautioned that this material may not be applicable to, or suitable for, the reader’s specific circumstances, desires, needs, and requires consideration of all applicable facts and circumstances. The reader understands and acknowledges that, prior to taking any action relating to this material, the reader (i) has been encouraged to rely upon the advice of the reader’s accounting, financial, investment, legal, and tax advisers with respect to the accounting, financial, investment, legal, tax, and other considerations relating to this material, (ii) is not relying upon Caliber or any of its affiliates, agents, employees, managers, members, or representatives for accounting, financial, investment, legal, tax, or business advice, and (iii) has sought independent accounting, financial, investment, legal, tax, and business advice relating to this material. Caliber, and each of its affiliates, agents, employees, managers, members, and representatives assumes no obligation to inform the reader of any change in the law or other factors that could affect the information contained herein.
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