Smart examples of alternative investments for diversification strategies

Real‑world examples of alternative investments for diversification strategies

If you only remember one thing, remember this: diversification is about behavior, not labels. An asset is “alternative” only if it behaves differently from the rest of your portfolio in bad markets.

Some of the most widely used examples of alternative investments for diversification strategies include:

• Private real estate funds and REITs
• Private credit and direct lending
• Infrastructure (toll roads, renewables, data centers)
• Hedge funds and liquid alternatives
• Commodities and gold
• Private equity and venture capital
• Farmland and timberland
• Collectibles (art, wine, classic cars) for a small slice of wealthier portfolios

Each example of alternative investment plays a different role: income, inflation protection, downside cushioning, or long‑term growth.

Private real estate as a core example of alternative investments for diversification strategies

Private real estate is often the first stop when investors look for examples of alternative investments for diversification strategies that feel tangible. You’re not just buying a ticker symbol; you’re buying interests in actual buildings with rent checks attached.

How private real estate behaves

Private real estate funds and non‑traded REITs typically:

• Generate steady income through leases
• Reprice more slowly than public REITs, which can dampen volatility
• Respond to local supply/demand and interest rates, not just stock market sentiment

Institutional investors have long used real estate for diversification. According to the National Council of Real Estate Investment Fiduciaries (NCREIF), core private real estate in the U.S. has historically shown lower volatility than public equities and a moderate correlation to the stock market.

In 2023, NCREIF’s Property Index showed a cooling in returns after the rate shock of 2022, but income yields remained attractive relative to investment‑grade bonds. That’s exactly why many pension funds keep a meaningful real estate allocation.

Practical examples include

In a diversified portfolio, examples of alternative investments for diversification strategies in real estate might include:

• A private multifamily housing fund focused on Sun Belt cities
• An industrial/logistics fund owning warehouses near major ports and highways
• A diversified non‑traded REIT with office, retail, and residential exposure

Risks you can’t ignore: leverage, interest‑rate sensitivity, and illiquidity. Many private funds limit redemptions or lock up capital for 5–10 years.

Useful reference on real estate risk and cycles: Federal Reserve’s research on commercial real estate markets at federalreserve.gov.

Private credit and direct lending: income‑focused examples of alternative investments

If you’re looking for income‑oriented examples of alternative investments for diversification strategies, private credit has exploded in relevance. As banks pulled back from middle‑market lending after the 2008 crisis and under tighter regulation, private funds stepped in.

Why investors care in 2024–2025

With policy rates elevated in the U.S. and Europe, private credit yields in 2024–2025 often run in the high single digits to low double digits, depending on risk. Many loans are floating rate, so income adjusts as central banks move.

These strategies typically lend directly to:

• Middle‑market companies backed by private equity sponsors
• Real estate developers and operators
• Specialty finance vehicles (equipment, trade, or asset‑backed lending)

How private credit diversifies

Private credit returns tend to be driven by credit spreads and underwriting quality, not broad equity market moves. In multi‑asset portfolios, this example of alternative investment can:

• Provide higher income than many public bonds
• Reduce mark‑to‑market volatility compared with traded high‑yield
• Add exposure to different sectors and structures than standard bond indexes

Downside: defaults spike in recessions, recoveries vary, and the lack of daily pricing can hide risk until something breaks. The SEC and other regulators have been paying more attention to this market as it grows; see the SEC’s materials on private funds at sec.gov.

Infrastructure and real assets: inflation‑aware examples of alternative investments

Infrastructure is one of the best examples of alternative investments for diversification strategies if you worry about inflation and long‑term stability. Think toll roads, airports, pipelines, cell towers, and renewable energy projects.

Why infrastructure behaves differently

Many infrastructure assets have:

• Long‑term contracts or concession agreements
• Inflation‑linked revenue (for example, tolls or utility tariffs that adjust with CPI)
• Monopolistic or oligopolistic market positions

That mix often leads to:

• More stable cash flows across the cycle
• Partial inflation protection
• Lower sensitivity to short‑term market swings

Examples include:

• A private fund that owns stakes in European toll roads and U.S. airports
• A renewable energy fund with solar and wind projects under long‑term power purchase agreements
• A listed infrastructure fund that holds cell tower and data center operators

Institutional investors, including large public pension plans, routinely allocate to infrastructure as part of their “real assets” bucket. The World Bank and OECD have published extensive research on infrastructure’s role in portfolios and economic development; see, for example, the World Bank’s infrastructure resources at worldbank.org.

Hedge funds and liquid alternatives: strategy‑driven diversification

Hedge funds are not an asset class; they’re a collection of strategies. That nuance matters when you’re looking for examples of alternative investments for diversification strategies that actually reduce risk.

Where hedge funds can help

Certain hedge fund strategies have historically shown low correlation to traditional markets, especially:

• Market‑neutral equity (long and short stocks in the same sector)
• Managed futures/CTAs that follow price trends across futures markets
• Global macro funds that trade currencies, rates, and commodities based on macro views

In 2022, when both stocks and bonds sold off, many managed futures strategies produced strong positive returns by riding trends in rising rates and falling equity indexes. That’s a real example of alternative investment behavior that can offset pain elsewhere in the portfolio.

Liquid alternatives—’40 Act mutual funds or ETFs that use hedge‑fund‑like strategies with daily liquidity—offer smaller investors access, though often with watered‑down leverage and tighter constraints.

The key is strategy selection. A long/short equity fund that stays net long 80–90% of the time may not diversify much in a crash; it just adds fees.

Commodities and gold: classic examples of alternative investments for diversification strategies

Commodities are one of the oldest examples of alternative investments for diversification strategies. You’re gaining exposure to raw materials—energy, metals, agriculture—rather than company earnings.

Why commodities matter again

After a decade of low inflation, the 2021–2023 inflation spike reminded investors why they hold commodities at all. Broad commodity indexes and energy exposures helped offset the real loss in bond portfolios as rates surged.

Gold, in particular, is often treated as a hedge against currency debasement, geopolitical stress, and systemic risk. It doesn’t always shine when stocks fall, but it tends to behave differently from both stocks and bonds over long periods.

Common implementation approaches include:

• Broad commodity index ETFs tracking futures
• Gold ETFs backed by physical bullion
• Commodity‑focused managed futures strategies

Risks: roll costs in futures, volatility, and long stretches of poor performance when inflation is stable and growth is decent.

For data‑driven investors, the Federal Reserve Bank of St. Louis (FRED) database at stlouisfed.org provides long‑term series on commodity prices and inflation, useful for testing how these examples of alternative investments for diversification strategies behaved in past cycles.

Private equity and venture capital: growth‑oriented alternatives

Private equity and venture capital are growth‑heavy examples of alternative investments for diversification strategies. They’re less about steady income and more about amplifying long‑term returns by:

• Taking companies private and restructuring them
• Providing growth capital to expanding businesses
• Funding early‑stage startups with high failure rates but big upside

Do they really diversify?

Economically, private equity is highly tied to the same growth and profit drivers as public equities. The diversification comes from:

• Different timing of valuations (quarterly or annual instead of minute‑by‑minute)
• Access to segments of the economy underrepresented in public markets
• Active control and operational improvements that can create value independent of market multiples

But make no mistake: in a deep recession, both public and private equity suffer. These examples of alternative investments for diversification strategies are best viewed as a higher‑octane equity sleeve, not a safe harbor.

Access is expanding through interval funds, listed private equity vehicles, and feeder funds, but fees, lockups, and manager selection remain major issues.

Farmland, timberland, and collectibles: niche examples of alternative investments

Once you move beyond the big categories, you find smaller, more specialized examples of alternative investments for diversification strategies that can make sense at the margins.

Farmland and timberland

Farmland and timberland offer exposure to:

• Biological growth (trees, crops)
• Land values tied to long‑term demand for food, housing, and paper/wood products

Historically, these assets have shown:

• Low correlation with stocks and bonds
• Some inflation protection
• Reasonably stable income from leases or harvests

Access options include private funds, publicly traded REITs specializing in timber, and in some cases, crowdfunding platforms that syndicate farmland deals.

Collectibles: art, wine, watches, cars

Collectibles are the most romanticized example of alternative investment, and often the most misunderstood. Yes, fine art or rare wine can appreciate significantly, but markets are thin, transaction costs are high, and data is messy.

For wealthy investors, a tiny allocation to collectibles can:

• Add a non‑financial return (enjoyment, status)
• Provide an asset that may behave differently from financial markets

But as a diversification tool, collectibles should be treated as a speculative satellite, not a core holding.

How to actually use these examples of alternative investments for diversification strategies

Listing examples is the easy part. The harder part is deciding how to use examples of alternative investments for diversification strategies without creating a Frankenstein portfolio.

Start with your core

Most investors are still best served by a core of:

• Public equities across geographies
• High‑quality bonds of appropriate duration

Alternatives sit around that core to solve specific problems:

• Need more income? Consider private credit or core real estate.
• Worried about inflation? Look at infrastructure and commodities.
• Want to smooth equity volatility? Explore market‑neutral or managed futures strategies.

Watch liquidity and concentration

A common mistake is overcommitting to illiquid examples of alternative investments for diversification strategies. If you have:

• A 60/40 public portfolio and add 30% in illiquid alternatives, you’re suddenly running a very different risk and liquidity profile.

Institutional investors often cap illiquid alternatives at a percentage that matches their long‑term liabilities and spending needs. Individual investors should be even more conservative.

Fees and governance matter more than marketing

Alternative strategies often carry higher management and performance fees. That’s not automatically bad, but it raises the bar for manager skill.

Before committing, ask:

• Is the strategy truly differentiated from what I can get in public markets?
• Is there a clear, repeatable process?
• How transparent is reporting?

Regulators like the SEC and FINRA regularly publish investor alerts on private offerings and complex products. It’s worth scanning those on sec.gov before wiring money to any alternative investment.

FAQ: examples of alternative investments for diversification strategies

What are some practical examples of alternative investments for diversification strategies for a typical high‑net‑worth investor?
Common allocations might include a mix of private real estate funds, a diversified private credit fund, a small sleeve of infrastructure, and a liquid alternatives fund using managed futures or market‑neutral equity. Some may add a measured allocation to private equity or venture capital. The exact mix depends on time horizon, liquidity needs, and risk tolerance.

What is a good example of an alternative investment for diversification if I’m mainly worried about inflation?
A practical example of inflation‑aware alternative investment would be a core infrastructure fund with regulated utilities, toll roads, and renewable energy projects where revenues are indexed to inflation. Pairing that with a modest allocation to commodities or a commodity index ETF can add further inflation sensitivity.

Are hedge funds still good examples of alternative investments for diversification strategies in 2024–2025?
Some are, some aren’t. Strategy matters more than the label. Market‑neutral, managed futures, and certain macro strategies have historically provided diversification benefits, especially in stressed markets. Long‑biased equity hedge funds, on the other hand, often behave like expensive stock funds with better marketing.

Can gold and commodities alone provide enough diversification as alternative investments?
Gold and commodities are useful examples of alternative investments for diversification strategies, but relying solely on them is risky. They can be highly volatile and go through long periods of underperformance. They tend to work best as part of a broader alternatives sleeve that also includes income‑producing assets like real estate or private credit.

What are examples of liquid vs. illiquid alternative investments for diversification?
Liquid examples include listed REITs, liquid alternatives mutual funds, commodity ETFs, and listed infrastructure funds that can be traded daily. Illiquid examples include private equity, venture capital, private real estate funds, private credit funds, and direct investments in farmland or timberland. The right mix depends on how much capital you can afford to lock up for years.

How much of my portfolio should be in alternative investments for diversification?
There is no single right answer, but many financial advisors suggest that for individual investors, a range of 10–30% in carefully chosen examples of alternative investments for diversification strategies can be reasonable, depending on wealth, income stability, and time horizon. Institutions may go higher because their liabilities are long‑dated and predictable. The key is to avoid overcommitting to illiquid strategies you might need to exit during stress.