Modern multi-asset portfolios: The rise of alternative investments

Over the last decade, multi asset solutions have become a popular part of advisers’ centralised investment propositions, offering a structured and risk managed way to blend asset classes and support consistent client outcomes. While equities, bonds and cash remain the foundation of many multi asset portfolios, evolving market conditions have prompted advisers and investment managers to widen the opportunity set. The use of alternative asset classes within the multi asset framework is on the rise, helping portfolios remain resilient in an increasingly complex market environment.

The term “alternatives” refers to asset classes that fall outside the traditional categories of equities, bonds and cash. As investment strategies involving alternative assets have become easier to access, investor interest in these options has also increased. Where property was once the main alternative asset class – encompassing both physical ‘bricks and mortar’ assets and real estate investment trusts with distinct liquidity profiles – today the range has expanded to include commodities, infrastructure, private markets, and absolute return strategies. Each plays a distinct role within a portfolio, offering sources of return that typically react differently to macroeconomic forces compared to mainstream asset classes.

By incorporating alternatives, multi asset managers introduce additional levers to enhance return potential or reduce drawdown risk without altering the client’s chosen risk profile.

Alternative assets may be able to respond to different economic drivers than equities and bonds. In a multi asset fund, this means they can be used to smooth the overall return profile and help maintain diversification even when traditional assets become more closely correlated. Because exposure is sized, monitored and adjusted by the multi asset manager, alternatives can contribute to a more stable long term journey within an agreed risk level.

Periods of higher inflation, shifting rate cycles or broad based market volatility can challenge the classic mix of equities and bonds. By incorporating alternatives, multi asset managers introduce additional levers to enhance return potential or reduce drawdown risk without altering the client’s chosen risk profile. This helps maintain consistency in outcomes while expanding the opportunity set behind the scenes.

Within a multi asset solution, alternatives can be used in targeted ways to support a portfolio’s objectives, whether stabilising income, managing inflation sensitivity, or adding long term growth potential. They allow portfolio managers to adjust asset allocation more precisely, helping advisers rely on a single, packaged solution that naturally adapts to changing market conditions without requiring separate product selection.

Of course, there are certain risks and downsides to alternatives that must also be taken into account when considering the use of alternatives in a multi-asset strategy.

Some alternatives – particularly physical property assets, private assets or certain infrastructure exposures – tend to be less liquid. Multi asset managers account for this when sizing positions, maintaining liquidity frameworks and through robust stress-testing. This all should form part of portfolio construction by managers who support access to these asset classes in a measured and transparent way.

Alternative strategies may involve higher management costs or operational fees. In a multi asset solution, these costs are considered alongside overall value for money and suitability, but advisers should understand how they contribute to the fund’s cost structure and fair value assessments.

Alternatives can be used in targeted ways to support a portfolio’s objectives, whether stabilising income, managing inflation sensitivity, or adding long term growth potential.

Illiquid or privately held assets may not be priced daily or may rely on fair valuation estimates. While multi asset managers implement robust oversight, this can still influence reported volatility and performance, as well as client communications. The greater degree of independence and robust governance around the striking of the portfolio Net Asset Value are important.

Although alternatives diversify the portfolio, they are not guaranteed to protect against every market shock. Some assets, such as commodities or certain hedge fund style strategies, can behave unpredictably during extreme periods. Multi asset managers manage this through allocation limits and diversification across alternative types, but advisers should ensure clients have realistic expectations. Having greater clarity on what each asset class or strategy is bringing to the table – and importantly what is not – will help understand different scenario outcomes.

The extent to which alternatives are used depends on the mandate, liquidity requirements, regulatory considerations and the fund’s risk profile. Advisers should select multi asset solutions that align with their clients’ needs rather than assuming alternatives are always appropriate. Transparency is vital alongside clear communication of the use of alternatives within mandates.

For advisers seeking to deliver resilient, outcome focused portfolios, alternatives can play a valuable role within a multi asset solution by providing additional diversification, broader sources of return and improved risk management. Crucially, these benefits are delivered through a professional, risk controlled framework that ensures alternatives are used appropriately and proportionately. When incorporated thoughtfully by experienced multi asset managers, alternatives help strengthen the long term robustness of portfolios and support more confident, personalised client conversations.