Reginald Labuschagne, Head of Product and Strategy at Sanlam Private Wealth

What are alternative investments?

Alternatives refer to investments that fall outside the traditional universe of investment categories. It’s important to distinguish between alternative assets and alternative structures:

Alternative assets are investments that differ from conventional assets such as stocks, bonds and cash. Unconventional strategies are often employed to manage these assets, such as leverage or short selling. They can be less liquid (meaning they can’t easily be converted to cash) and may have lower correlation with traditional markets. Examples include:

• Hedge funds. These funds are pooled investment vehicles that employ diverse strategies and techniques to seek returns in varying market conditions.

• Real assets. infrastructure and property. Examples of infrastructure investments are toll roads, power utilities and renewable energy projects. Property could range from residential or commercial developments to industrial real estate.

• Collectibles. These include vintage wine, fine art, rare watches or classic cars – they are tangible, often passion-driven assets. While they exhibit little correlation to financial markets and can perform well over long periods, they tend to require deep specialist knowledge and patience.

• Digital assets: cryptocurrencies. These are blockchain-based digital tokens (such as bitcoin and Ethereum) that operate independently of traditional financial institutions. While they are gaining traction, they remain highly speculative and volatile.

Alternative structures, by contrast, refer to investment vehicles that may hold both traditional and nontraditional asset types – they are typically less liquid with lock-ups of up to 10 years. They include vehicles such as multi-strategy and private real estate investment funds, but also illiquid strategies such
as:

• Private equity and venture capital. These are privately held companies that are not listed on public stock exchanges. Private equity typically focuses on mature businesses, while venture capital targets early-stage companies, often technology or biotech startups.

• Private credit. Also known as private debt, this refers to non-bank loans made to companies, often with more attractive yields but higher complexity than traditional bonds.

Key trends

Investing in alternatives typically involves longer time horizons, lower liquidity and specialised expertise. With less regulation and higher barriers to entry, these investments have traditionally been the preserve of institutional and ultra high-net-worth investors. The move into this space was pioneered by large North American endowments – such as Harvard University and the Ontario Teachers’ Pension Plan – which, with their perpetual capital, sought long-term growth through investments in private equity, private credit, hedge funds and even real assets like timberland. Their strong long-term returns prompted family offices to follow suit.

Today, as access improves and investment structures become more flexible, the appeal of alternatives is extending into the broader wealth management space, reaching a wider audience of sophisticated individual investors.

Several structural and macroeconomic shifts support this trend. Low real yields on traditional fixed income have driven demand for higher-returning strategies, while institutional allocations to alternatives – including by endowments and large pension funds – continue to rise.

Tighter regulations and capital requirements have led traditional banks to pull back from many areas of lending. Private credit managers have stepped in to fill the gap, often with greater flexibility and better structuring capabilities. Unlike banks, they can tailor financing solutions to more complex borrower needs.

Innovation in investment vehicles – such as interval funds, feeder funds and semi-liquid structures – has made alternatives more accessible to a broader range of investors. At the same time, the market structure itself is changing. With more capital available to them, companies are choosing to stay private
for longer, often bypassing the traditional initial public offering (IPO) route altogether.

Increasing regulatory burdens in the listed space have further discouraged public listings when companies reach a certain size or require growth capital. As a result, the total number of listed companies globally has declined over the past two decades (with a few notable exceptions, such as India), making private markets an increasingly important source of opportunity for long-term investors.

Role of alternatives

Alternative investments can play a strategic role in building stronger, more resilient portfolios. Their primary value lies in diversification – delivering returns that are uncorrelated with the ups and downs of traditional equity and bond markets. By behaving differently across market cycles, alternatives can help smooth overall portfolio performance and improve risk-adjusted returns over time.

For example, private equity can provide exposure to dynamic companies and innovative sectors not represented in listed markets, while real assets such as infrastructure and property can offer a degree of protection against inflation. Hedge funds could generate returns through a variety of strategies across a range of market conditions. Private credit, meanwhile, has become a compelling source of yield, with the potential for lower volatility than traditional high-yield bonds.

It’s also worth considering the broader economic benefit of investing in alternatives. Private markets channel capital into areas that drive innovation and long-term growth – whether it’s venture capital backing breakthroughs in biotech and artificial intelligence, or infrastructure funds partnering with governments to build essential public services. These investments play a vital role in supporting entrepreneurship, job creation and economic development.

In South Africa, the development of a more active private investment ecosystem to complement public markets could be transformative, unlocking funding for local entrepreneurs and enabling growth beyond the listed space.

It’s important to note, however, that from an investment point of view, the benefits of alternative investments do come with some trade-offs. Many alternatives offer limited liquidity and often require longer lock-up periods, which can make them less suitable for short-term capital needs. They also tend
to be more complex, with less transparent valuations and reporting standards than public investments.

Costs tend to be higher too, with layered management and performance fees. Regulatory and tax considerations can be intricate and can vary widely across jurisdictions and structures, making professional guidance essential.

A final thought

Alternatives aren’t a substitute for traditional investments. However, they can play an important supporting role in a well-diversified portfolio. Their inclusion can help smooth returns over time, reduce portfolio volatility and tap into opportunities unavailable through conventional routes.

That said, they’re not without their challenges – they require careful analysis, a long-term investment horizon and a clear understanding of the unique risks involved. Your portfolio manager can help you determine the most appropriate way of incorporating alternative investments into your broader wealth
strategy.

ENDS