Beyond 60/40: A Guide to Alternatives for Private Investors

by Cory Shea, Founding Partner at Clockwork.

A standard 60/40 stock/bond allocation is a thing of the distant past. 

That said, while institutional investors allocate over 25% on average to privates, non-institutions lag at less than about 10%. Although that number skews higher with family offices and UHNWI’s, some of whom are allocating 50% or more to alternatives. 

It’s easy to understand why, considering that private markets have outpaced publics over the past 15 years, returning a blended net 15% vs. 10% from the MSCI All Worlds Index tracking publics (recent market calamity excluded). 

Beyond returns, alternative and private investments offer unique qualities that public markets simply can't match. They also tend to be among the most value-aligned opportunities—where investors can see their capital make a real, tangible impact.

This article is a primer on alternative investments - designed for those new to the space, as well as investors looking to evolve their private portfolios.

General things to consider when allocating to alts:

• Proactive vs. Reactive - many investors start out by simply reacting to private investment opportunities. But without a clear framework, it’s easy to make poor decisions, and losses can pile up quickly. A proactive approach means having a strategy in place: setting portfolio allocation targets, defining limits for single investments, deciding between fund vs. direct exposure, planning for coinvestment and follow-ons, etc.

• Liquidity - it’s absolutely critical to understand cash flow and liquidity realities when making private investments (and commitments); returns often take longer than expected, while fund capital calls can strain available cash..

• Fund Managers & Co-investments – Early on, partnering with experienced fund managers is a smart move, especially those with deep expertise in areas where you're still building knowledge. It’s a great way to learn by observing professionals, avoid common pitfalls, and occasionally gain access to direct co-investment opportunities alongside the fund.

• Negotiate Fees - whenever possible, aim to negotiate fees. Larger check sizes often give you leverage. Co-investing can be a strategy to bring down overall blended fees if you are not paying extra for those opportunities. 

• Consistency - after setting your allocation target, aim to invest steadily over time rather than deploying all your capital at once. This approach helps spread exposure across multiple market cycles and reduces the risk of being overly concentrated in a single fund vintage.

From PE to RE, let’s look at the Alts:

Private Equity & Venture Capital - have you seen my MOIC?

Why? Private equity and venture capital funds are among the most popular alternative investments, offering professionally managed access to companies with potential for significant growth. 

While funds do charge fees (sometimes on the higher side) they handle everything from sourcing and due diligence to portfolio management, offering investors a relatively hands-off way to access the asset class. For many asset owners, it’s an efficient entry point. That said, there’s a tradeoff: while funds offer diversification and risk mitigation, they typically deliver more balanced returns compared to the potentially higher upside (and downside) of direct investments in individual companies.

What to look out for? This class of investment, particularly venture capital, is characterized by very high return dispersion among managers. As such it’s important to be in the top quartile of managers (or better decile), or returns are likely to be unimpressive.

Historic Returns: Venture Capital - median 14%, top decile 35%, bottom decile -5%; Private Equity - median 14%, top decile 30%, bottom decile 1%

Private Credit & Yield - sometimes cash flow is king 

Why? Private credit and other yield oriented investing refers to providing capital without buying equity in the business. Investment lifecycles are shorter, and cash flows turn on more quickly. Upside is capped by an interest rate, or an agreed upon return on capital (often the case with revenue-based financing). In the current market, private credit and yield structures are a fantastic complement to equity investments.

What to look out for? Similar to equity investments, it’s important to recognize that total or majority loss of capital is possible. If the company fails, credit investors usually have a senior position and can receive partial return from sale of assets, ahead of equity holders. Underwriting the fundamentals and financial health of a given business is critical, and it’s best to build a diversified portfolio to account for potential defaults.

Historic Returns: Ranges from low single digits to mid teens in the US, with higher interest rates availability globally or in nuanced direct lending instances. 

Direct Investments - chasing the next 1000x

Why? Deploying equity capital into companies directly can offer the best value alignment for investors. These investments offer the opportunity to propel forward the people, ideas, and ecosystems you wish to see succeed. 

From an economic perspective, direct investing is often more affordable (no management fees or carry), but comes with higher risk. Compared to investing in a fund run by a professional manager, direct investing can be time-consuming both in sourcing and structuring new deals, and monitoring them throughout the investment lifecycle, which can last a decade or more. 

High quality deal sourcing, especially with smaller check sizes, can also be challinging. 

What to look out for? Before jumping into direct investing, it’s a good idea to consider your objectives and constraints – what are you looking to achieve, and avoid. Timelines can be long, and many losers are likely to realize before any winners (which may not emerge for years).

Founders can be erratic, and even in some cases dishonest. Investors should expect a wild ride, though also a rewarding one, as entrepreneurs work to achieve their biggest dreams. It’s important to have a defined strategy, including number of target companies for the portfolio, check ranges, follow-ons etc. Direct investing usually falls into two camps: a focused approach, where the investor has deep knowledge of a specific sector or geography, or a broader "spray and pray" model that prioritizes volume over specialization.

Historic Returns: Like VC, these vary heavily, in this case ranging from complete loss of capital through 25+% for top decile returns. It is important to consider blended returns across a portfolio vs. one-off investments which can see wilder swings.

 Real Estate - brick and mortar, where returns are concrete 

Why? Passive income from rent, and capital appreciation as property prices rise over time. Depending on the type of property and structure of the investment, real estate can often provide stable returns and act as a hedge against inflation.

What to look out for? Leverage is the key word here. Projects oversaddled with debt can go wrong with unforeseen delays or expenses. Timelines are often longer than projected, regulatory concerns exist, and specific markets face individual risks, as do particular asset classes (ex. office space markets during the pandemic and persistent work-from-home trend). 

Historic Returns: Median 10%, top decile 23%, bottom decile negative 7-8%. Direct investing has a higher return dispersion with funds falling in a more narrow range. 

Real Assets - let’s get physical

Why? Real assets (infrastructure, commodities, farmland, e.g.) can act as an inflation hedge, and are typically less correlated with the broader portfolio. These investments can offer stable returns over the long-term, and provide exposure to tangible value vs. other financial assets.

What to look out for? Capital expenditures are typically large, and individual projects carry idiosyncratic risks - geopolitical, regulatory, and operational among classic financial risks like overleverage and valuation considerations. 

Historic Returns: Ranges from 20% to -5%, median mid-single digits.

Lifestyle & Collectibles - when it’s time to let your hair down

Why? Because they’re fun! And sometimes you might even make some money. Art, cars, watches, wine, etc. Many will exclude these from a formal investment strategy and rather tend to think of these as expenses - while they’ll likely have some residual asset value, it may not be necessary to track returns and performance, but then again, they can offer returns over longer periods and are seen as less correlated with the markets.   

Other

This primarily refers to hedge funds, crypto, derivatives, and similar assets. While these are typically classified as alternatives, they fall outside the scope of this piece, which focuses specifically on private market vehicles.

Before you go

We know this guide just scratches the surface of the dynamic, complex, and exciting space of alternatives. We live and breathe these asset classes, and have seen it all over the past decade—helping some of the world’s most interesting private investors build resilient, high-performing portfolios. So if you’re looking to refine your approach, expand your allocation, or just want a sounding board as you navigate the space—we’d love to connect.

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Cory Shea is a Founding Partner at Clockwork, the digital investment office for private markets. With a combined technology + team approach, Clockwork delivers value to clients and partners to ensure they are well equipped to make informed decisions with their private investments, to the benefit of all involved.

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