How to Use Alternative Investments in Asset Allocation

24 February 2026

When most people think of investing, their minds go straight to stocks and bonds. But what if I told you there’s a whole other world out there? A world made up of real estate, private equity, hedge funds, even art and wine. That’s right—these are called alternative investments, and they can completely change the way you build your portfolio.

In this post, we’re going to walk through how to use alternative investments in asset allocation. You don’t need to be a millionaire or a Wall Street pro to get started. With the right strategy, you can enhance your returns, reduce your risk, and create a more balanced financial future.

What Are Alternative Investments?

Let’s start with the basics. Alternative investments are any assets that fall outside the traditional categories of stocks, bonds, and cash. They include:

- Real Estate
- Private Equity
- Hedge Funds
- Commodities (like gold or oil)
- Infrastructure
- Venture Capital
- Collectibles (art, wine, rare coins, etc.)
- Cryptocurrencies

They’re not usually traded on public exchanges and can be less liquid. But here’s the kicker—they often move differently than traditional investments, which can be a huge win for your portfolio.

Why Should You Consider Alternatives in Your Asset Allocation?

Think of asset allocation like putting together a well-balanced meal. Stocks are your protein, bonds your veggies, and alternatives? They're the seasoning that can spice things up and make everything more palatable.

Here’s why they matter:

1. Diversification

Ever heard the phrase, "Don’t put all your eggs in one basket"? That’s asset allocation in a nutshell. Alternatives can help because they’re often less correlated with traditional markets. So when stocks tank, your alternatives might hold steady or even go up.

2. Risk Reduction

Including assets that don’t move in sync with the rest of your portfolio can significantly reduce volatility. It’s like adding a shock absorber to your car—it smooths out the bumps.

3. Potential for Higher Returns

Some alternatives, especially private equity and venture capital, have the potential for higher returns—but they usually come with higher risk. Still, they offer access to growth you can’t find in the public markets.

4. Inflation Protection

Real assets like real estate or commodities often perform well during inflationary periods. Think of them as a financial umbrella during economic storms.

Types of Alternative Investments and How to Use Them

Alright, now that we know what alternatives are and why they're useful, let’s break down the main types and how they could fit into your portfolio.

1. Real Estate

Real estate is the OG of alternatives. Whether it’s rental properties, commercial buildings, or REITs (Real Estate Investment Trusts), this asset class provides both income and appreciation potential.

- How to Use It: Consider allocating 10-20% of your portfolio into real estate for steady cash flow and long-term growth. Even if you don’t want to buy property, REITs or real estate crowdfunding platforms offer exposure with less hassle.

2. Private Equity

Private equity involves investing directly in private companies. This could mean buying out a business, providing capital to startups, or investing in private equity funds.

- How to Use It: Ideal for long-term investors with a higher risk tolerance. Keep it as a small slice—say 5-10%—of your portfolio if you're seeking high-growth potential.

3. Hedge Funds

Hedge funds pool money and try to “hedge” risk using various strategies like short selling, leverage, and derivatives. They aim for absolute returns, not just market-beating returns.

- How to Use It: Best for high-net-worth individuals, but some platforms now allow access with smaller capital. Limit exposure to 5-10% and pair it with more conservative assets.

4. Commodities

Think gold, oil, natural gas, and agricultural products. Commodities are real assets and tend to do well when inflation spikes.

- How to Use It: They’re great as an inflation hedge. A 5-10% allocation in commodities or commodity ETFs can go a long way in balancing your portfolio during volatile times.

5. Infrastructure

Toll roads, water facilities, renewable energy… Infrastructure assets are long-term and often backed by governments. They provide stable returns and often yield regular income.

- How to Use It: Consider them a bond alternative. Allocate 5-10% if you're seeking yield with lower volatility.

6. Collectibles and Art

These are passion investments. Art, rare stamps, vintage cars—if curated wisely, they can appreciate and be a store of value.

- How to Use It: These shouldn’t be core portfolio components but can be fun and potentially lucrative if you know the market. Keep it under 5%.

7. Cryptocurrency

Ah yes, the digital wild west. Crypto assets like Bitcoin and Ethereum have gained massive popularity. Super volatile, but also high return potential.

- How to Use It: Not for the faint-hearted. Allocate only what you’re willing to lose—start small, maybe 1-3% of your portfolio, and don’t forget to rebalance.

How Much of Your Portfolio Should Go to Alternatives?

There’s no one-size-fits-all answer here. It really depends on your risk tolerance, financial goals, investment horizon, and experience.

But here’s a rough guideline:

| Risk Tolerance | Suggested Allocation to Alternatives |
|----------------|--------------------------------------|
| Conservative | 5-10% |
| Moderate | 10-20% |
| Aggressive | 20-30% |

Always remember: diversification isn't just about adding more—it’s about adding the right mix.

The Pros and Cons of Alternative Investments

Before you dive in, let’s weigh the good and the not-so-good.

✅ Pros

- Portfolio diversification
- Inflation protection
- Potential for outsized returns
- Access to unique investment opportunities

❌ Cons

- Less liquidity (some lock your money for years)
- Higher fees
- Complex structures
- More difficult to value

Practical Tips for Getting Started

Not sure how to begin? Here are some actionable steps:

1. Start Small

Dip your toes in. Consider real estate funds, gold ETFs, or beginner crypto platforms.

2. Do Your Homework

Alternatives can be complex. Read up, attend webinars, follow trusted financial blogs, or work with a financial advisor.

3. Use Technology

Platforms like Fundrise (real estate), Masterworks (art), or YieldStreet (private credit) make alternatives accessible to everyday investors.

4. Keep Tracking

Just because alternatives are “alternative” doesn’t mean they should be ignored. Monitor performance and rebalance when needed.

5. Understand the Risks

Don’t invest in something just because it’s hot. If you don’t understand it, you probably shouldn’t invest in it (yet).

Are Alternative Investments Right for You?

Look, alternatives aren't for everyone. But if you're someone who wants to shake up your investment game, reduce dependency on traditional markets, and perhaps add a dash of excitement to your portfolio—why not consider them?

Ask yourself a few questions:
- Do you have the time to learn and monitor these investments?
- Can you afford to have money tied up for a while?
- Are you comfortable with increased complexity and risk?

If the answer is yes, adding a healthy dose of alternatives might just be the next step towards building a more resilient, high-performing investment strategy.

Final Thoughts

Using alternative investments in asset allocation isn’t just for hedge fund managers or tech billionaires. It’s a practical, smart way to round out your portfolio—boosting returns, cutting risk, and helping you ride out market ups and downs with more confidence.

Start slow, do your research, and think critically about your financial goals. With diversification as your North Star, alternatives might just be the secret sauce your portfolio’s been missing.