What are alternative investments and how can they help diversify a portfolio? 

Alternative investments are generally investments and strategies outside traditional listed shares, bonds and cash. They can include private equity, private credit, property, infrastructure, commodities and hedge-fund-type strategies. 

However, there is no single universal definition, and investments grouped under the same label can behave very differently. Some may be used to pursue long-term growth or income, while others are designed to generate returns differently from equity and bond markets. 

So, rather than simply asking ‘What are alternative investments?’, another useful question is: ‘What could an investment add to my existing portfolio?’ 

At a glance 

• Alternative investments broadly refer to assets and strategies outside traditional investments such as listed shares (equities), bonds and cash.  

• They can include property, infrastructure, commodities, private equity, private credit and hedge-fund-type strategies, among others.  

• Alternatives can provide different sources of return from traditional investments and can help diversify a portfolio.  

• At Progeny Asset Management, we define alternatives as strategies that aim to add incremental returns over time while providing a diversified source of return.  

• Alternative does not mean low risk. Depending on the investment, risks can include loss of capital, illiquidity, complexity and higher costs, making careful fund selection important.  

• Liquidity can vary considerably. Some private-market investments can tie up investors’ money for several years, while others can be bought and sold much more frequently. The alternative funds currently used by Progeny Asset Management offer daily dealing.  

• Most importantly, investors should understand how an alternative investment aims to generate returns, the risks involved and the role it plays alongside the rest of their portfolio. 

The UK alternatives market is substantial. Research from the Financial Conduct Authority (FCA) found that the value of UK-managed alternative investment funds reached £1.8 trillion in 2025, with private credit among its fastest-growing segments. This figure relates to the FCA’s regulatory category of alternative investment funds (AIFs), which is broader than the definition of ‘alternative investments’ used in this article. Under the UK regulatory framework, an AIF is broadly a collective investment undertaking that is not subject to the UK UCITS regime. [fca.org.uk] 

What are alternative investments? 

Alternative investments broadly include investments and strategies outside traditional listed equities, bonds and cash but there is no single definition. 

Depending on who you ask, the category could include: 

• private equity 

• private credit 

• property 

• infrastructure 

• commodities, including gold 

• hedge funds 

• quantitative and systematic strategies 

• collectibles 

Saying you invest in alternatives is a little like saying you’re going abroad. It tells you something, but not enough to know where you’re going or what you’re likely to experience when you get there. 

One investment might be designed to generate long-term growth, while another may target income or returns that behave differently from equity and bond markets. Understanding what’s inside the investment is therefore more informative than relying on the name alone. 

Alternative assets versus alternative strategies 

There is also an important distinction between alternative assets and alternative investment strategies. An alternative asset could be something tangible or privately held, such as infrastructure, property or a stake in an unlisted company. 

An alternative strategy, on the other hand, might invest in familiar investments such as shares and bonds, but use them in different ways. For example, rather than relying on markets rising to generate returns, some strategies aim to benefit from differences in how individual investments perform. Others look for opportunities across different markets by analysing economic conditions, market trends or data. 

This means an alternative investment does not necessarily need to invest in assets traditionally considered ‘alternative’, such as private or physical assets. It could invest in familiar assets such as shares and bonds but use different strategies to generate returns. 

What are some examples of alternative investments? 

Alternatives encompass a wide variety of assets and strategies, each with its own potential sources of return, risks and liquidity characteristics. 

Type	What it broadly involves	Important considerations
Property and infrastructure	Exposure to assets such as commercial property, transport, utilities and energy networks	Economic sensitivity, financing costs and liquidity
Commodities	Exposure to assets such as gold and energy	Prices can be volatile and affected by supply, demand, currencies and geopolitical developments
Private equity	Investing in companies that aren’t publicly traded	Long investment horizons, limited liquidity and manager risk
Private credit	Lending through privately negotiated loans rather than publicly traded bonds	Credit risk, liquidity and access to capital
Alternative strategies	Strategies that aim to generate returns in different ways, such as investing based on changes in the economy, seeking to benefit from both rising and falling markets, or using rules-based investment decisions.	Complexity and strategy-specific risks

Private equity provides a good example of how different alternatives can be from conventional investments. Private-equity funds commonly have long investment horizons and can significantly restrict an investor’s ability to withdraw capital. [investor.gov] 

By contrast, some alternative investment strategies are available through funds offering regular or daily dealing. That difference becomes particularly important when considering the role alternatives might play within a wider portfolio. 

Why might investors include alternative investments in a portfolio? 

Some alternative investments are designed to provide return drivers that differ from traditional equity and bond markets. If they achieve this, they may provide an additional source of portfolio diversification. 

Diversification does not simply mean holding more investments, it means avoiding excessive reliance on the same underlying risks. Think of it like building a football team. Putting eleven strikers on the pitch gives you more players, but it doesn’t necessarily give you a balanced team. Different players need to perform different jobs. 

The same applies to an investment portfolio. You could own numerous funds but still be heavily dependent on equity markets continuing to rise. The FCA describes diversification as investing across different products and markets that don’t rely on the same factors to perform well at the same time. [fca.org.uk] 

Whether an alternative investment provides that diversification depends on the strategy, its underlying exposures and the market environment. 

Why might investors look beyond shares and bonds for diversification? 

Shares and bonds can diversify each other effectively in some market environments, but this relationship isn’t constant. There can be periods when both fall at the same time. 

When market interest rates fall, the price of existing fixed-rate bonds will generally rise, all else being equal. This has historically enabled high-quality bonds to provide some diversification during certain periods of equity-market weakness. 

Higher inflation can complicate that relationship. If inflation leads markets to expect tighter monetary policy, bond yields may rise and existing bond prices may fall. Equities can also come under pressure, although their performance depends on a wider range of factors, including company earnings, valuations and the economic outlook. 

2022 provided an example of shares and bonds falling at the same time. During the first half of the year, the Morningstar Global Markets Index fell 20.1%, while the Morningstar Global Treasury Index declined by more than 15%. [indexes.mo…ngstar.com] 

That doesn’t mean bonds have stopped providing diversification, nor does it mean shares and bonds will regularly fall together but it does illustrate why investors shouldn’t assume the relationship between different investments will remain constant. 

Some alternative strategies are designed to introduce other return drivers into a portfolio. Whether they provide meaningful diversification in practice will depend on the individual strategy and market conditions. 

Are alternative investments risky? 

Alternative investments can fall in value, and some carry significant risks. ‘Alternative’ shouldn’t be interpreted as meaning safe, defensive or low risk. 

Depending on the asset or strategy, risks may include: 

• Investment risk: the investment can fall in value, and investors could receive back less than they invested. 

• Liquidity risk: it may be difficult to sell an investment when desired. 

• Credit risk: a borrower may fail to repay its debt. 

• Leverage risk: the use of borrowing or certain financial instruments can increase potential returns but can also increase potential losses. 

• Manager risk: performance may depend significantly on the decisions made by the investment manager. 

• Model risk: quantitative strategies may rely on models and assumptions that don’t work as expected. 

• Valuation risk: assets that aren’t traded regularly can be difficult to value accurately. 

• Cost: some specialist strategies may carry higher fees than lower-cost conventional investment funds. 

The FCA requires alternative investment fund managers within its regulatory framework to disclose information including the investment techniques used, their associated risks and the use of leverage. Individual fund and manager selection can therefore be particularly important. 

Investors can choose trackers designed to replicate broad equity or bond indices. By contrast, there is no single widely accepted benchmark representing the full range of alternative assets and strategies. Investors therefore need to understand how an individual strategy expects to generate returns and the risks being taken to achieve them. 

What does liquidity mean in alternative investing? 

Liquidity describes how easily an investment can be bought or sold. From an investor’s perspective, the practical question is often simpler: how easily can I access my money? This varies considerably across alternatives. 

Some private-market investments can require investors to commit their money for several years. For example, private-equity funds commonly have investment horizons of ten years or more. [investor.gov] 

At the other end of the spectrum are funds offering daily or regular dealing. A daily-dealt fund ordinarily allows investors to submit instructions to buy or sell on each dealing day, subject to its terms, settlement arrangements and any permitted restrictions. 

However, dealing frequency isn’t the whole story. Investors also need to consider the liquidity of the assets held within the fund. A fund offering frequent withdrawals while holding assets that take significantly longer to sell can create a mismatch between the access offered to investors and the liquidity of the underlying investments. 

In August 2026, the FCA finalised new rules and guidance intended to strengthen liquidity risk management in UK retail investment funds. The changes take effect from February 2027, with transitional arrangements applying to some requirements. So, the useful question isn’t simply ‘How often can I deal in this fund?’, but also ‘How readily can the investments inside it be sold?’ 

Does an alternative investment automatically provide diversification? 

No. Being classified as an alternative investment does not automatically make an investment a good diversifier. What matters is whether its underlying return drivers and risks are genuinely different from those already in the portfolio. 

Property provides a useful example. A publicly traded real estate investment trust, or REIT, gives investors exposure to property through shares that trade on a stock exchange. Its market price can therefore be influenced by wider equity-market sentiment as well as property fundamentals, financing costs and interest-rate expectations. 

That doesn’t mean REITs cannot play a useful role in a portfolio. It simply demonstrates why the label ‘property’ or ‘alternative’ doesn’t tell an investor everything they need to know about how the investment might behave. Effective diversification means looking beyond the label and understanding what drives an investment’s returns and risks. 

Do alternatives replace traditional investments? 

Alternatives are generally used to complement traditional investments, rather than replace them. Equities are typically expected to be an important driver of long-term portfolio growth, while alternatives can provide different sources of return and help diversify some of the risks associated with investing in equities. 

In our approach, alternatives therefore sit more naturally alongside bonds as another way of diversifying equity risk. Their role is not necessarily to deliver the same growth as equities, but to help manage the journey by providing returns that may behave differently in changing market conditions. 

This matters because investing is not simply about where you hope your portfolio will end up; it’s also about being able to remain invested through periods of market uncertainty and volatility. 

How can diversification affect the investment journey? 

Diversification can’t eliminate market falls, but reducing reliance on a single source of return can potentially create a portfolio whose overall risks are better aligned with an investor’s circumstances and objectives. This is where portfolio construction intersects with financial planning. 

Large market falls can be difficult for investors to experience, particularly when negative headlines reinforce short-term concerns. Selling following a decline turns an unrealised loss into a realised one and may prevent an investor from participating fully in a later recovery. However, decisions to sell or rebalance should always reflect individual objectives and circumstances. 

A portfolio whose risks are appropriate for an investor’s risk tolerance, time horizon and financial plans may be easier to hold through difficult markets. Diversification can contribute to that objective, but it cannot prevent losses or guarantee how an investor will respond. 

What should investors consider before investing in alternatives? 

The starting point shouldn’t simply be whether an investment carries the ‘alternatives’ label. Investors need to understand whether its risks and return characteristics are appropriate for them and how it contributes to their wider portfolio. 

Useful questions could include: 

1. What does the investment own? 

2. Where are its returns expected to come from? 

3. What could cause it to lose money? 

4. How might it behave under different market conditions? 

5. Is it genuinely different from the risks already in my portfolio? 

6. How quickly can I access my money? 

7. How liquid are the underlying investments? 

8. What fees and other costs will I pay? 

9. Is the investment regulated, and what investor protections apply? 

10. What benchmark or objective should I use to judge its performance? 

11. What specific role is it intended to perform within my portfolio? 

That final question is particularly important. 

An investment intended to provide diversification shouldn’t necessarily be judged by whether it beats the stock market over a short period. A more useful measure may be whether it provides the different pattern of returns and risks that it was included to deliver. 

The bigger question: what job is the investment doing? 

There isn’t one universal answer to what alternative investments are, because the term encompasses assets and strategies with very different characteristics. 

Property, infrastructure, commodities, private equity, private credit and hedge-fund-type strategies can all sit beneath the alternatives umbrella, but they don’t necessarily behave alike or solve the same portfolio problem. 

Alternative investments aren’t a shortcut to lower risk, nor are they automatically superior to shares and bonds. Their potential value depends on what they contribute to the wider portfolio, alongside their risks, costs and liquidity characteristics. 

So perhaps the most useful question isn’t simply: 

‘Should I invest in alternatives?’ It is: ‘What am I trying to diversify against, and does this investment genuinely help me do it?’ 

Please note

The information contained within this article is subject to the UK regulatory regime and is therefore primarily targeted at consumers based in the UK.

This article is distributed for educational purposes only. This communication does not constitute financial advice. Individuals must not rely on this information to make a financial or investment decision. Before making any decision, we recommend you consult your financial planner to take into account your particular investment objectives, financial situation and individual needs.

The opinions stated in this article are those of the author and do not necessarily represent the view of Progeny and should not be relied upon to make a financial decision.

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The value of an investment and the income from it can fall as well as rise and investors may get back less than they invested. Your capital is therefore always at risk. It should be noted that stock market investing is intended for the longer term.