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Alternatives Playbook

Our outlook, asset class views, and allocation guidance for private markets and liquid alternatives investments. It leverages our institutional investment expertise, deep resources, and global investment platform.

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Q1 2025 alternatives outlook

The new year brings two distinct themes to our alternatives outlook. First, the removal of 2024 election uncertainty, which we anticipate will help improve capital markets activity. Second, we still anticipate a central bank normalization of interest rate policy. Inflation is stubbornly above targets but slowly heading in the right direction. We expect a higher-for-longer rate environment for the foreseeable future. Growth remains a concern. The sentiment over a slowing economy and rising unemployment rate, however, appears to be overshadowed by the excitement around a more favorable regulatory and tax regime. Due to tightening spreads in both public and private markets over the past quarter, we’ve slightly reduced our overweight to credit strategies in our multi-alternative asset class positioning. Private markets and liquid alternatives are still appropriate tools to help investors improve growth, enhance potential income, and diversify a portfolio,1 in our view.

Asset class views

Due to elevated downside growth risks, high stock valuations, and benign capital markets activity, we remain neutral in allocating risk within our alternatives portfolio. We’re currently monitoring improved mergers and acquisitions (M&A) activity after the US elections. In general, we’re more defensive, favoring private debt and hedged strategies versus private equity. Within asset classes, we look for assets that don’t rely on leverage to generate returns, which we’ll reassess as base rates are lowered.

Private real assets outlook and positioning

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Private credit outlook and positioning

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Private equity outlook and positioning

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Hedge funds outlook and positioning

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Listed real assets and commodities

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Digital assets outlook and positioning

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Get an in-depth look at our alternatives Q1 outlook and positioning based on valuations, fundamentals, and secular trends.

Asset allocations to consider

Adding private market and liquid alternatives assets to an investment portfolio may be able to provide enhanced returns, volatility mitigation,3 diversification,1 and income potential.4 Advisors are looking to increase their allocation to alternatives according to research from Cerulli Associates, in partnership with the Investments & Wealth Institute (IWI).5 (See asset allocations below.)

Advisor-reported current asset allocations
Advisor-reported optimal asset allocations

Sample alternatives allocations

For those thinking about adding alternative investments to portfolios, consider our sample allocations. The actual allocations will vary based on a client's objectives, risk tolerance, comfort with illiquid investments, and how alternatives fit into their overall portfolio. We also provide suggestions on how to consider funding new alternatives allocations using traditional portfolio assets.

Asset class Sample allocation Liquidity scale Role in portfolio Funding source Related products
Private equity 20 - 30% Low Growth 100% equities N/A
Private real assets 20 - 30% Low Growth
Income
Diversification1
50% equities
50% fixed income
Invesco Real Estate
Private credit 20 - 30% Low Income
Diversification1
30% equities
70% fixed income
XCRTX
 
Hedge funds 10 - 20% Medium Diversification1 100% fixed income N/A
Listed real assets and commodities 3 - 10% High Growth
Income
Diversification1
70% equities
30% fixed income
PDBC
MLPTX
Digital assets 0 - 7% High Growth
Diversification1
80% equities
20% fixed income
BTCO
QETH

These sample allocations are recommended starting points for how to incorporate an asset class into an alternatives bucket. Of the 13.3% reported optimal allocation to alternatives, the above sample allocations provide percentages for allocating among the alternatives asset classes.

Get positioning for your equity and fixed income allocations in our monthly Portfolio Playbook

Alternatives at Invesco 

Diversify portfolios with alternative assets across public and private markets to achieve enhanced returns and mitigate risk.

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Footnotes

  • 1

    Diversification: Invesco Real Estate. Trailing 5-years of data, 2019Q3-2024Q2, latest data available. Private Real Estate Debt Direct correlation to other asset classes: Private Real Estate Debt – 1.00, Direct Lending  – 0.29; Senior Loans – 0.18; High Yield – 0.20; Private Real Estate Equity – 0.28; Corporate Bonds – 0.10; CMBS – (0.07); Investment Grade Bonds – (0.9); Treasuries – (0.25); U.S. Equity – 0.26. Diversification does not guarantee a profit or eliminate the risk of loss. There is no guarantee that any trends shown herein will continue. Correlation is the degree to which two investments have historically moved in relation to each other.

  • 2

    Source: Invesco, Bloomberg as of Aug, 31, 2024. Correlations are measured from Jan. 2000 to Dec. 2023 between the HFRI Global index (Hedge funds) and traditional assets, namely global fixed income (Bloomberg Global Agg 0.28) and Global Equities (MSCI ACWI 0.7). The HFRX Global Hedge Fund Index is designed to be representative of the overall composition of the hedge fund universe. It is comprised of all eligible hedge fund strategies falling within four principal strategies: equity hedge, event driven, macro/CTA, and relative value arbitrage. The Bloomberg Global Aggregate Bond Index is a broad-based index that measures the performance of global investment grade fixed-rate debt markets. It includes a variety of bonds and securities from both developed and emerging markets. The MSCI All Country World (ACWI) Index, which is a market capitalization weighted global equity index that tracks the performance of developed and emerging markets.

  • 3

    Enhanced returns, volatility mitigation: Source: Invesco Real Estate.  Trailing 5-years of data, last 5 years of quarterly returns annualized 2019Q3-2024Q2, latest data available. Total returns and standard deviation (annualized) by asset class: Direct Lending  – 9.22% and 3.71; Private Real Estate Debt – 6.73% and 0.84; Senior Loans – 5.53% and 8.51; High Yield – 3.92% and 10.56; Private Real Estate Equity – 3.42% and 5.50; Corporate Bonds – 0.62% and 9.11; CMBS – 0.66% and 5.01; Investment Grade Bonds – (0.23%) and 6.31; Treasuries – (0.65%) and 6.71; U.S. Equity 15.05% and 19.46, respectively. Past performance is not indicative of future results. There is no guarantee that any trends shown herein will continue. Standard deviation measures a portfolio’s or index’s range of total returns in comparison to the mean.

  • 4

    Income Potential: Source: Invesco Real Estate.  Trailing 5-years of data, last 5 years of quarterly returns annualized 2019Q3-2024Q2, latest data available. 5-Year Average Distribution Yields: Direct Lending  – 10.15%; Private Real Estate Debt – 8.66%; Senior Loans – 7.04%; High Yield – 6.75%, Private Real Estate Equity – 4.27%; Corporate Bonds – 3.76%; Commercial Mortgage Bonds (CMBS) – 3.53%; Investment Grade Bonds – 3.03%; Treasuries – 2.46%. Past performance is not indicative of future results. An investment cannot be made into an index. There is no guarantee that any trends shown herein will continue.

  • 5

    Source: Cerulli Research: Advisors were asked. "Across your client portfolios, please estimate their typical alternatives asset allocation. How do you expect this to change in the next two years, and what would be the optimal asset allocation? (Optimal Asset Allocation: If there were no investment restrictions and clients had a strong knowledge of alternatives. Please estimate the optimal allocation for your core client segment.)" Other buckets provided were equities and fixed income. Survey conducted in Q2 2023.

  • 6

    Source: Pitchbook “3Q24 Global M&A Report” as of 9/30/24.

  • 7

    Source: Burgiss’ Private Equity Large Buyout Index shows shows a 6.3% return over the last four quarters to June 2024 versus a 12.4% compound annual growth rate using quarterly data from December 1999 to June 2024, most current data available. The Burgiss’ Private Equity Large Buyout Index measures private equity funds that close for more than $2 billion. Compound annual growth rate is the rate of return that an investment would need to have every year in order to grow from its beginning balance to its ending balance, over a given time interval. Past performance is not indicative of future results. An investment cannot be made into an index.

  • 8

    Source: Bloomberg September 2024.

  • 9

    Source Bloomberg and Invesco. Using 36 monthly returns from the end of December 2021 to November 2024 – most current available - of US Consumer Price Index to represent inflation, S&P 500 Index to represent US equities, the Bloomberg Commodities Index to represent a broad range of commodities and the Bloomberg US Aggregate Index to represent fixed income correlations were calculated using the Pearson method. The correlation between inflation and commodities was found to be 0.3, between inflation and US equities -0.19 and between inflation and fixed income -0.25. The S&P 500® Index is an unmanaged index considered representative of the US stock market. The Bloomberg Commodity Index is a broadly diversified commodity price index. The Bloomberg US Aggregate Bond Index is an unmanaged index considered representative of the US investment-grade, fixed-rate bond market.