Ways to invest in alternatives 

Unlike traditional stocks and bonds, alternatives tend to be complex and illiquid. Investors typically access them in two main ways:

• Direct investments in private businesses, real assets, or credit opportunities
• Fund structures, where a manager pools capital and invests across multiple deals or funds on your behalf

Common structures include:

• Primary Funds: You commit capital to a new fund, and the manager draws it down over time as deals are identified
• Secondary Funds: You buy into an existing fund that’s already investing, typically at a discount
• Direct Investments: You invest directly in a company, real property, or a private loan
• Co-Investments: You invest alongside a fund manager in a specific deal, often at lower fees and with more transparency into the underlying asset compared to a fund structure

Key players: who does what

General Partner (GP): This is the fund manager who makes day-to-day decisions on behalf of the fund. They typically earn a management fee of 1%–2% annually plus a share of the profits of 10-20% above a predetermined hurdle rate.

Limited Partner (LP): The limited partners provide capital to the fund but have no role in management decisions. Limited partners receive distributions after fees, profits interest, and expenses are paid to the GP or Investment Manager advising the fund.

Fund structures you should know

Drawdown Funds: Traditional private funds with a set life cycle. Investors commit capital up front, which is then “called” over a multi-year investment period, typically 3 to 5 years, as the manager identifies opportunities. Once investments are made, the fund moves into a management and exit phase, where investments are gradually sold and capital is returned to investors. These funds typically last 7 to 12 years.^[4]

• Considerations: Illiquidity is a central feature; capital is locked up for the duration of the fund. Cash flows can be unpredictable due to the varying timing of capital calls and distributions. Secondary market sales may offer an exit, but often at a discount.

Evergreen Funds: Open-ended structures without a defined end date. Capital is invested and reinvested on a rolling basis as investments mature. Instead of winding down, evergreen funds maintain a consistent portfolio by using proceeds from exited positions to fund new opportunities. Liquidity is offered periodically, usually quarterly or semi-annually, with notice periods and potential redemption limits as well as potential initial lock-ups.^[5]

• Considerations: While more flexible than drawdown funds, evergreen funds are still illiquid compared to public market funds. They involve a liquidity mismatch because investors can potentially redeem their fund shares more frequently than the underlying illiquid investments can be sold. Redemption terms, gates, and valuation lags must be carefully reviewed. Performance can vary widely depending on the manager’s execution and portfolio turnover.

Types of alternative investments

Alternatives span multiple asset classes, each with distinct risk, return, and liquidity characteristics:

• Private Equity: Ownership stakes in private companies, from early-stage startups to established buyouts. Typically requires 10-12 year commitments with returns heavily dependent on manager skill and market timing.
• Private Credit: Direct lending to companies outside traditional banking, including loans secured by real estate or equipment. Generally offers steadier income-based returns over 5-7 years, but with limited liquidity during market stress.
• Real Assets: Physical investments like real estate, infrastructure, and commodities that may provide inflation protection and steady cash flows, though performance varies widely by asset type and location.
• Hedge Funds: Actively managed strategies using leverage, short-selling, and complex instruments to generate returns across market cycles. More liquid than private markets but with highly variable performance and significant manager risk.

Each category requires specialized due diligence, and performance can vary dramatically between top and bottom managers. The complexity and fees associated with these investments make manager selection and ongoing oversight critical to success.

Key considerations before investing

Liquidity: In the case of a private fund, does the liquidity of the fund structure match the liquidity of the underlying investments? Do the liquidity needs of the end investor match the time horizon of the fund? Always consider the fund’s longest allowable distribution timeline.

Manager Access: How difficult is it to access top managers, and does Fulcrum have access to those top-performing managers, in the sizes appropriate for our clients?

Fees: Are incentives aligned between the fund manager and the end investor (LP)? Are fees reasonable and appropriate? Are net of fee returns compelling enough over public markets to compensate for the lack of liquidity, operational hurdles, and reporting?

Valuation Frequency: Private assets are typically valued quarterly or annually, not daily like stocks. That can mute volatility but delay recognition of gains or losses.^[6] With less frequent valuation, is the underlying asset or strategy just masking volatility?

Tax Considerations: Do investors have the needed infrastructure to handle the additional complexity, and at what cost?

Diligence & Oversight: Can we perform the necessary in-depth due diligence required to truly understand the investment and operational risks?

Approach with Caution

Alternative investments have become increasingly popular among high-net-worth investors seeking to enhance returns and diversify beyond public markets. However, it’s important to approach this asset class with a healthy degree of skepticism. While alternatives can provide access to unique opportunities, they also carry meaningful trade-offs.

Illiquidity remains one of the biggest challenges. Many private investments lock up capital for 7–12 years, making it difficult to rebalance portfolios or meet unforeseen liquidity needs. According to the SEC, limited redemption options in private funds can create serious risks for investors during periods of market stress.^[7]

Manager dispersion is another concern. The performance gap between top and bottom-quartile managers can be substantial. Data from Burgiss shows that the spread in private equity returns can exceed 15% ^[8]. Without strong access and selection capabilities, investors may be exposed to subpar performance.

Fee structures are often complex and costly. Investors may face layered fees—management, performance, fund-of-funds expenses—that can significantly reduce net returns. While industry standards call for transparency and shared interests between fund managers and investors, this alignment isn’t always achieved in practice.^[8]

Opaque reporting distorts true results. Unlike publicly traded assets, private funds have less disclosure and greater variability in valuation practices. Quarterly or annual valuations may obscure short-term volatility, and failed funds disappear from benchmarks, making historical returns look better than reality. Investors must rely heavily on internal fund reporting with limited independent verification.^[6]

Tax complexity is real. From K-1 forms to unrelated business taxable income (earnings that can trigger taxes even in tax-sheltered accounts like IRAs and foundations), alternative investments can complicate tax reporting and planning, particularly for trusts, estates, and other tax-sensitive structures.^[9]

Operational due diligence remains essential—and expensive. According to Deloitte, the cost of thoroughly evaluating a private fund can exceed $100,000, putting comprehensive diligence out of reach for many investors.^[10]

Advisor incentives may not align with your interests. Many financial advisors receive higher compensation for selling alternative investments compared to traditional assets, shifting their focus from client outcomes to revenue generation.

These complexities make it crucial that your wealth manager possesses deep expertise and experience in this space, ideally backed by relevant credentials such as the Chartered Financial Analyst (CFA) or Chartered Alternative Investment Analyst (CAIA) designations. Caution, access, experience, and due diligence matter more than ever.

At Fulcrum, we believe alternatives can play a meaningful role in client portfolios—but only when they are appropriately sized, selectively chosen, and thoughtfully integrated within a broader wealth strategy. We receive zero product-based compensation or incentives to recommend alternative investments. As fiduciaries, our recommendations are based solely on what we believe serves your interest, not what generates the highest fees for our firm.

Given the challenges and pitfalls, we look for opportunities that provide differentiated return potential and that complement your broader asset allocation. This means identifying experienced managers, negotiating appropriate access, and performing rigorous due diligence. Also, we generally do not recommend hedge funds or other expensive and illiquid forms of portfolio insurance. In other words, we use alternatives to enhance returns, not to reduce risk.

If you’d like to explore how alternatives might complement your investment strategy, we invite you to contact your Fulcrum Wealth Manager.