Alternative investments are assets outside the traditional world of stocks, bonds, and cash, ranging from private equity and real estate to hedge funds, private credit, and even fine wine. A recent BlackRock survey found that nearly one in four retirement plan administrators are weighing whether to add these assets within the next year, with target date funds the most likely vehicle to carry them.
Why Retirement Plans Are Suddenly Interested
Two forces are pushing plan sponsors toward alternatives. First, expectations for plain vanilla stock and bond returns have cooled considerably. The S&P 500 has posted average annual returns of 14.5%, 10.2%, and 8.1% over the past five, 10, and 20 years respectively, as of May 2025. But Goldman Sachs (GS) analysts, among others, forecast something far more modest for the decade ahead: just 3% annually, a call made in late 2024 before the economic slowdown and market turbulence of early 2025 even hit.
Second, alternatives tend to move differently than stocks and bonds do, which is where correlation comes in. It is a statistical measure of how closely two assets track each other. Commodities, for instance, show a fairly low correlation with the S&P 500, while hedge funds barely move in step with bonds at all. That gives portfolio builders a genuine diversification tool rather than just another bet on the same market forces.
The scale of this shift is notable. The alternative investment market was valued at $18.9 trillion in 2024 and is projected to nearly double to $37.8 trillion by 2032, growing at roughly 7.9% a year. Institutions have long leaned into this space: they hold an estimated 25% of assets in alternatives, compared with about 20% for high net worth individuals and roughly 10% for retail investors. That gap is precisely what plan sponsors and fund companies are now trying to close.
Getting In: Who Can Actually Buy These Assets
Access used to be tightly restricted. For years, alternatives were mostly the domain of accredited investors, meaning people who clear certain income, net worth, or investing experience thresholds, along with large institutions writing big checks. That is changing as employer sponsored retirement plans start incorporating alternatives directly.
Retail investors without accredited status now have several doors into this market. Exchange traded funds and real estate investment trusts offer straightforward, liquid exposure. Business development companies, which lend to smaller companies banks tend to avoid, trade like stocks but behave more like private credit funds. Newer hybrid structures, including interval funds and tender offer funds, let ordinary investors put money into private credit or private equity strategies with lower minimums than the old institutional gatekeepers required.
Interval funds are closed end funds that allow investors to redeem shares only at scheduled intervals, often every three, six, or 12 months. Tender offer funds work a bit differently: redemptions happen when fund managers choose to offer buybacks, with no fixed calendar. Both structures trade some liquidity for access to strategies that would otherwise be out of reach for most savers.
How Each Major Asset Class Has Actually Performed
Private equity has historically produced some of the strongest returns in the alternatives space, though it follows a distinctive pattern known as the J curve: losses in the early years followed by stronger gains as investments mature. During downturns, private equity typically dips, but not as sharply as public stock indexes, and it tends to recover faster. Estimates vary widely depending on methodology, but most research points to an illiquidity premium of roughly 3% to 5% over comparable public market investments, compensating investors for locking up their money for years at a time. Investors seeking public market access to private equity firms themselves have generally fared worse, based on the performance of the S&P 500 Private Equity Index.
Core real estate has delivered annualized returns of about 7% over the past decade with notably less volatility than publicly traded REITs. Adjusted for inflation using Bureau of Labor Statistics and Federal Reserve data, real estate has grown at a 6.3% compound annual rate since the housing market bottom in 2011, 2.9% since the end of the Great Recession, and 4.0% since the pandemic recession ended. It held up reasonably well through the inflationary stretch bookended by the recessions of the 1970s, posting a 3.2% inflation adjusted compound annual growth rate. REITs, which must distribute at least 90% of taxable income as dividends, outperform direct property ownership over time but swing much harder: they fell 35% to 40% in 2008, roughly double the drop in residential and commercial real estate, yet the FTSE Nareit All Equity REITs Index gained 24.9% in 2022, a year when both commercial and residential property values also rose.
Hedge funds present a mixed picture depending on strategy. Using Hedge Fund Research data, the HFRI 500 Fund Weighted Composite Index posted a compound annual growth rate of 3.71% from 2005 through the start of 2025, while the HFRI Fund of Funds Index, tracking funds that invest in other hedge funds, returned 3.32% annualized over the same stretch. Investors wanting similar exposure through an ordinary brokerage account can look at ETFs designed to mimic hedge fund strategies, such as the ProShares Hedge Replication ETF (HDG).
Private credit, sometimes called private debt, has expanded rapidly over the past decade as banks pulled back on lending after the 2008 financial crisis. It still represents just 1.5% of the overall global debt market, but its growth has been steady. Over 20 years, private credit funds have generally produced annualized returns in the high single digits to low double digits, with notably less volatility than public high yield bonds. Because these loans are typically structured with floating rates, they held up especially well when interest rates climbed in 2022 and 2023, returning 6% to 12% while public high yield bonds posted losses. Business development companies, which invest mainly in debt (often secured) issued by midsize, below investment grade companies underserved by traditional banks, track private credit performance closely. BDC yields commonly range from 8% to 15%. Ares Capital (ARCC), the largest BDC with a $15 billion market cap, carried a 9.5% yield as of May 2025.
Where Cryptocurrencies, Commodities, and Collectibles Fit
Cryptocurrencies have swung wildly since drawing broad attention in the mid 2010s. Bitcoin posted a 31.3% compound annual growth rate between the December 2017 approval of bitcoin futures ETFs and the start of 2025, and a striking 67.3% annualized over the same period measured from 2020. But the declines have been just as dramatic, including a 65.1% drop in 2022. Crypto has also failed to act as the safe haven many assumed it would be: on days of sharp market losses, such as in April 2025, cryptocurrencies fell right alongside stocks rather than cushioning the blow, based on a review of TradingView data.
Commodities have historically returned a modest 3% to 5% annually over the long run, though volatility rises considerably once oil prices enter the picture. Their correlation with the S&P 500 sits around 0.40, a low but not negligible figure that tends to shift depending on economic conditions, since energy prices often soften as demand slows in a recession. Gold stands apart within the group, having delivered roughly 8.3% annual returns since the gold standard ended in 1971, reinforcing its long running reputation as a store of value.
Collectibles round out the alternatives universe, covering fine art, rare wine, classic cars, and watches. Returns can be competitive but come bundled with real illiquidity and valuation headaches, and transaction costs can run as high as 25%. The Sotheby's Mei Moses Art Index shows fine art returning about 8.5% annually from 1950 into the early 2020s, though with long stretches of losses along the way. Rare wine, tracked by the Liv-Ex Fine Wine 1000, has returned 8% to 10% annually since its inception with comparatively lower volatility. For gems, watches, and rare coins, where comprehensive indexes are harder to come by, Bureau of Labor Statistics import price data serves as a rough proxy, showing a compound annual growth rate of about 4.4% between 2000 and early 2025.
What Happens as Alternatives Move Into Ordinary 401(k)s
Private credit, real estate, and infrastructure are the alternatives most likely to show up inside sponsored retirement plans, according to industry analysts, largely because they can be packaged into diversified vehicles like target date funds and offer either steady income or protection against inflation. That packaging matters: it lets everyday savers gain exposure without having to evaluate individual private deals themselves.
Still, complexity does not disappear just because a fund wrapper makes an asset easier to buy. Liquidity terms, fee structures, and the underlying risks of privately held loans or properties remain real considerations for anyone whose 401(k) suddenly includes a slice of private credit or real estate. As nearly a quarter of retirement plans consider these additions, the practical question for savers is not whether alternatives can help diversify a portfolio, since the historical data on correlation and returns generally supports that they can, but whether the specific fund, its fees, and its redemption terms fit an individual's own timeline and tolerance for less liquid holdings.