What are alternative investments? Alternative investments (often called “alts“) are assets outside of a traditional portfolio of publicly traded stocks and bonds. Their returns are sometimes uncorrelated to the returns of the broader stock market, which can make them useful for diversification beyond a standard 60/40 portfolio. Historically, alternatives were generally only accessible to institutional investors due to high minimums and regulatory constraints. Over the past two decades, regulatory shifts and the expansion of the exchange-traded fund (ETF) wrapper have made alternatives investment strategies increasingly available to individual investors.

Common alternative investment strategies include:

• Real Assets – Commodities: Commodities include raw materials and natural resources (for example: energy related resources like oil and natural gas, agricultural products like wheat and corn, building materials like timber, or industrial metals like copper). Because commodity prices are driven by asset-specific supply/demand dynamics, commodity returns are often uncorrelated to stock market returns.
• Real Assets – Precious Metals: Gold, silver and other precious metals are among the oldest stores of value. Gold especially acts as a “safe haven” during uncertainty, inflation, or currency debasement. Historically, precious metal returns have had a low or negative correlation with stock market returns.
• Private Equity/Private Credit: Investments in private companies (i.e. private equity) and private company debt (i.e. private credit) are other forms of alternative investments. Private investments often have limited liquidity (1 to 10 year lockups) and are not suitable for investors that need regular liquidity. Private equity and private credit returns often appear to be uncorrelated with daily stock market returns because prices are not frequently updated by third-party buyers and sellers, but over longer time frames (and adjusted for leverage, size, and industry) have been shown to be correlated with publicly traded stocks.
• Hedge Funds: Hedge funds are private pools of investment capital that are legally structured to be exempt from the Investment Company Act of 1940. Hedge funds thus do not need to abide by the strict disclosure, diversification, leverage, liquidity, and reporting requirements that govern mutual funds and ETFs. Hedge funds are far from a homogenous investment strategy; they comprise a highly fragmented landscape of bespoke mandates ranging from equity long/short and global macro to market neutral and special situations. There are a few mutual funds and ETFs that attempt to replicate some of the more common liquid investment strategies associated with hedge funds. However, because hedge funds invest in such a wide variety of different strategies, often assuming novel risk exposures, linear correlation measures are a less useful indicator when considering how their inclusion might impact a traditional portfolio of publicly traded stocks and bonds.
• Infrastructure: Alternative investments for infrastructure involve investments in assets like toll roads, utilities, pipelines, renewable energy and AI-related infrastructure like datacenters. Because these investments are often contractually structured to generate stable, long-term cash flows, their short-term return fluctuations are often uncorrelated to the daily movements of the broader stock market.
• Cryptocurrencies/Blockchain Technology: The most common cryptocurrency is Bitcoin and is often referred to as “digital gold” for its store of value potential. Cryptocurrencies are often decentralized, which is a key differentiation from traditional financial markets. Cryptocurrency returns can exhibit extreme volatility but have often shown low correlation with the returns of stock market indices over certain periods.

The Role of Alternatives in a Portfolio

The primary role of alternatives in a portfolio is to provide diversification and uncorrelated returns to a traditional portfolio of publicly traded stocks and bonds . Adding truly uncorrelated assets means that when one part of your portfolio is declining, another part may be holding its value.

The chart below shows the range of annual outcomes for the stock market from 1970 – 2025 based on different allocations to stocks and alternative investments. As you add alternatives, the worst year gets meaningfully less severe while the average return during that time-period reduces only modestly. The historical addition of alternative investments in this example resulted in a narrowing of the potential return outcomes (i.e. volatility) and provided downside protection during stock market declines.

Figures are illustrative, based on historical characteristics of the HFRI Fund Weighted Composite Index (hedge funds), NCREIF Property Index (real estate), Burgiss Infrastructure Index, and the S&P 500. Methodology consistent with KKR Global Macro & Asset Allocation research (2023) and J.P. Morgan 2025 Long-Term Capital Market Assumptions. Blended alternatives = composite of hedge funds, private credit, real assets, and real estate. Past performance is not indicative of future results. For educational purposes only.

Why Alternatives Are Important

Most individual investors think about a traditional investment portfolio of 60% stocks and 40% bonds. A balanced portfolio of stocks and bonds provides important diversification to insulate an investor during inevitable stock market downturns. For example, bonds often provide downside protection, or go down less, during periods of stock market declines.

With that said, a portfolio of publicly traded stocks and bonds is never fully diversified, as those securities do not capture the return stream of all economic assets. There are periods when stocks and bonds decline together, but other assets rise. A good example of this was 2022 when stocks and bonds were both down materially in the same year. In fact, 2022 was one of the worst years for a traditional 60/40 investment portfolio in decades as the Federal Reserve aggressively raised interest rates to fight COVID-related inflation.

The chart below shows the performance of alternatives during the bear market of 2022. As shown, alternatives meaningfully outperformed the S&P 500 and provided important portfolio diversification during the market downturn. This underscores the portfolio-protection role that alternative investments can play.

Sources: S&P 500 total return (Standard & Poor’s); HFRI Fund Weighted Composite Index (Hedge Fund Research, Inc.); Private equity mark-to-market return (Cambridge Associates U.S. PE Index); Commodities: DJ-AIG/Bloomberg Commodity Index (BCOM); Precious metals: gold spot price (LBMA). Private equity returns are on a lagged, smoothed NAV basis. Alternative investments can lose money, may be illiquid and may not provide protection in all drawdowns, and correlations can change. Past performance is not indicative of future results. For educational purposes only.

Important Considerations – The Math

Sized correctly, alternatives have the potential to provide a “smoother ride” for your investment journey. Protecting capital in a market downturn has a direct mathematical impact on your long-term wealth. For example, a portfolio that falls -50% requires a +100% gain just to break even, but a portfolio that falls -25% only requires a +33% gain to break even.

Conclusions

Regardless of the size of the investment, alternatives can play a role in reducing the volatility of a traditional portfolio of publicly traded stocks and bonds . However, alternatives do not come without negatives. Exchange traded mutual funds and ETFs that are designed to replicate traditional alternative return profiles must still comply with the investor protections provided under the Investment Company Act, but truly private alternative investment vehicles do not. Sophisticated investors who have the scale to hire their own specialized attorneys can vet and directly negotiate private investment contracts with the managers of their investment vehicles. However, often smaller investors only regretfully discover the impact of a private contract’s fine print when performance turns south. In addition to the increased due diligence needed to vet alternative investments, factors like investor liquidity needs, risk tolerance and investment access influence the use of alternatives within an investment portfolio. Alternative investments often come with lock-up periods that can extend out to 10+ years. Any investment in alternatives needs to come with a clear understanding of liquidity and access to that capital.

The primary goal for a long-term investor is to outpace inflation and compound real wealth over time. This requires maintaining the discipline to survive market cycles without disrupting the compounding process. Reducing portfolio volatility through investment in alternatives can play a role in keeping investors invested for the long-term.

Disclosure: Leavell Investments provides custom investment portfolios for each individual client and determines the suitability of alternative investments based on the client’s risk tolerance and liquidity needs. Leavell generally limits its allocation to private investment vehicles. As a result, alternative exposure is typically achieved through ETFs and mutual funds.

Jason joined the Leavell team in September 2024. Jason’s previous work experience includes hedge funds and investment banking roles with Evercore ISI and FBR Capital Markets. He previously worked for GMT Capital, a $3 billion Atlanta-based long/short hedge fund, where he was responsible for generating new equity investments for the fund. Most recently, he was a portfolio manager of publicly traded insurance companies for Millennium Management, a New York-based multi-strategy hedge fund. Jason holds a bachelor’s and master’s degree in finance from the University of Florida. He and his wife, Kristen, have two young children. Jason is an avid outdoorsman and enjoys golfing and spending time with his family.

Leavell’s Team-Based Approach to Client Relationships

At Leavell, we believe exceptional financial guidance begins with a collaborative approach. Every client is supported by a dedicated team that ensures personalized, comprehensive, and responsive service.

Each client team includes:

• Investment Counselor – Your primary advisor, focused on understanding your financial goals, risk tolerance, and long-term objectives. The Investment Counselor designs a customized investment strategy and holistic financial plan tailored to your unique needs.
• Portfolio Manager – Responsible for executing your investment strategy. The Portfolio Manager makes investment decisions, actively monitors market conditions, and adjusts portfolios to stay aligned with your goals.
• Client Service Representative – Delivers attentive, high-touch service. From account setup and document management to money movement and ongoing inquiries, your Client Service Representative ensures every detail is handled with care.

This team-based structure enables Leavell to provide well-rounded support and long-lasting client relationships built on trust, expertise, and continuity.

Important Disclosures: The statements and opinions expressed in this article are those of the authors as of the date of the article, are subject to rapid change as economic and market conditions dictate, and do not necessarily represent the views of Leavell Investment Management, Inc. This article does not constitute investment advice, is not predictive of future performance, and should not be construed as an offer to sell or a solicitation to buy any security or make an offer where otherwise unlawful. Investing in securities carries risk including the possible loss of principal. Individual circumstances vary. Past performance is no guarantee of future results.