A Practical Taxonomy of Alternative Investments
Understanding the Diversity of Alternatives: From Real Estate to Crypto
One of the most common questions I get from new team members or family principals is deceptively simple: “What exactly do you mean by alternatives?”
It’s a fair question. “Alts” is a broad label that covers everything from core real estate to crypto tokens.
But in my experience—both at a pension fund and now at a family office—how you classify and organize the alt universe shapes how you build, manage, and ultimately compound capital through it.
At AWM, we use a framework that breaks the space into ten categories: private equity, private debt, real estate, infrastructure, venture capital, hedge funds, secondaries, crypto, co-investments, and direct deals. It’s not perfect, but it’s practical—and it helps ensure we stay thoughtful about the role each bucket plays.
Core Categories: Income, Inflation Protection, and Growth
Private equity and venture capital are the long-term growth engines. PE focuses on improving mature businesses, often over 5–10 years, while VC backs early-stage, high-upside companies. Both are illiquid, high-risk, and long-duration—but also the best shot at accessing true alpha from private markets. They don’t generate regular income, and inflation protection is indirect, but they’re crucial for long-run compounding.
Private debt, on the other hand, is more about steady income. Direct lending, real estate credit, and asset-backed strategies can offer attractive yields, especially when structured with floating rates—which can help when inflation and rates are rising. But credit selection and downside protection become even more critical in downturns.
Real estate and infrastructure are classic “real assets.” They tend to shine during inflationary periods because rents, tariffs, and replacement costs rise with prices. Income streams are often contracted and predictable. Infrastructure—especially in regulated utilities, transport, and digital infra—offers particularly bond-like cash flows, but with the added benefit of tangible asset backing.
Strategy-Oriented Exposures and Portfolio Tools
Hedge funds are more about strategy than asset class. Some seek diversification through macro or market-neutral exposures. Others focus on yield via credit or arbitrage. In my pension fund days, we leaned on certain macro and quant managers for downside protection when rates and equities were both challenged. But dispersion is wide, and fees can erode value quickly without tight underwriting.
Secondaries are a portfolio construction tool. They offer accelerated deployment, discounted entry, and vintage diversification—especially helpful when building a new program. They’re not a direct inflation hedge, but they provide flexibility and cash flow smoothing, which helps in overall planning.
Co-investments and direct deals are where concentrated views meet deep alignment. In our framework, they sit on top of a primary-led core, and we only pursue them after years of building GP relationships and in-house diligence capabilities. They can enhance returns, especially when done with low fees and strong control, but they require more time, judgment, and risk management.
Emerging Exposures and the Role of Crypto
Cryptocurrencies are firmly in the alt category now. We treat crypto as a satellite position—small, high risk, and with a very different return driver. Bitcoin may be “digital gold” in theory, but in practice its behavior has varied across regimes. For us, crypto is less about inflation hedging and more about optionality on new infrastructure and asset paradigms. It’s not core, but it’s worth understanding.
Pulling It All Together
This classification helps us design portfolios where:
- Core real assets and private credit deliver income and inflation resilience
- Growth strategies like PE, VC, and directs aim for long-term capital appreciation
- Tools like secondaries and co-invests improve pacing and net returns
- Satellites like hedge funds and crypto add diversification and idiosyncratic upside
The Takeaway
In alternatives, how you organize matters almost as much as what you invest in. A clear, working taxonomy makes better decisions easier: where to lean in, where to stay cautious, and how to sequence capability development. That’s what turns a collection of deals into a real portfolio.
Source: AWM Internal Analysis
