“Alternatives” is one of the least useful words in investing. It groups together private credit and venture capital, long-short equity and distressed assets — strategies whose only shared characteristic is that they are not a plain listed portfolio.

Treating them as a single allocation is how portfolios end up with several funds that all fail at the same time, in the same way, for the same reason.

Start with the job, not the category

Before considering any alternative allocation, we prefer to be explicit about what it is being asked to do. In practice, most requirements fall into one of four buckets:

  • Return enhancement. Accepting illiquidity and dispersion in exchange for a higher expected outcome — typically private equity or venture capital.
  • Contractual income. Lending against defined cash flows, where the return is largely known if the underwriting holds — private credit.
  • Diversification of outcome. Strategies whose results do not depend on the direction of the index, including some Category III approaches.
  • Access. Ownership of assets or situations that simply cannot be bought in listed markets.

If a fund cannot be placed clearly in one of those roles, it is usually being considered because it is available rather than because it is needed.

Illiquidity is a price, not a feature

Long lock-ins are sometimes described as a benefit that protects investors from their own behaviour. There is truth in that, but it should not obscure the cost. Capital committed for eight years cannot be redeployed when a better opportunity appears, cannot fund a business requirement, and cannot be exited if your circumstances change.

The right question is not whether you can tolerate illiquidity, but what premium you are being paid for it — and whether that premium survives the fee structure.

Dispersion between the best and worst fund of the same vintage is far wider in private markets than in listed ones. Selection is not an edge here; it is the entire proposition.

Sizing before selection

We size alternatives as a share of the total portfolio first, and only then choose funds. Two practical constraints shape that number: the capital must be genuinely surplus to any requirement over the fund’s life, and the commitment schedule must be manageable alongside everything else the investor is doing. Drawdowns arrive when the manager calls them, not when it is convenient.

Diversification within the allocation matters too — across vintage years, across strategy, and across manager. A single fund in a single vintage is a concentrated bet on one team’s judgement during one part of a cycle.

What we examine

The manager’s own capital in the fund. Consistency between the stated mandate and the actual portfolio. Track record across a full cycle rather than one favourable vintage. Valuation policy for unlisted positions, and who signs off on it. The fee waterfall, hurdle and catch-up. Governance, custodian and audit. Realistic exit paths, tested against what has actually happened to comparable assets.

Used deliberately, alternatives can add something a listed portfolio genuinely cannot. Used as a status purchase, they add complexity, cost and years of waiting for clarity.