Many retail investors want to invest in alternative assets—but don’t fully understand them

Younger investors seem especially interested in alternatives. Those ages 25 to 44 are overrepresented among the most interested investors, whereas those over 55 are underrepresented (figure 2).

Younger people also seem to be more willing to allocate a bigger chunk of their money and retirement savings to alternatives. Among interested investors, the median target allocation of liquid assets to alternatives is 30% for people ages 18 to 34, and 25% for those ages 35 to 54. In comparison, the median target allocation of liquid assets for interested investors over age 65 is half that at 15%. Target allocations of retirement savings are overall lower, with a median target allocation of 20% for respondents ages 35 to 64 (figure 3).

Understanding the roadblocks for investors

Still, there is a significant gap between retail investors’ interest and their knowledge of these assets.

For instance, respondents identified illiquidity risk—the risk that the asset cannot easily or quickly be sold—as one of their top concerns when making an investment. But when asked about their tolerance for quarterly liquidation caps of different amounts, the proportion of respondents indicating that they would not invest in a product with this feature increased with the size of the cap. Since a larger cap allows for more liquidations, this finding suggests that at least some retail investors don’t fully understand the basics of how liquidation caps work.

Investors don’t necessarily perceive the knowledge gap, though—the survey found that an investor’s self-rated knowledge of an asset class was strongly correlated with their level of investment interest.

The findings also suggest that structuring products for these investors may pose challenges for today’s asset managers. High-net-worth and institutional investors have typically agreed to longer-term investments with alternative asset managers as a way to seek higher returns. In contrast, many financial products offered to retail investors are more liquid and do not require investment minimums.

While younger investors appear to be the most interested in alternative assets, they also typically invest relatively small amounts and hold investments for two years or less. In fact, Deloitte’s survey shows 80% of retail investors have a typical investment horizon of less than five years for non-retirement investments (see figure 4 for a more detailed breakdown by age group).

Meanwhile, the median value of a single non-retirement investment is $1,000. For those under 35, the typical investment size is even smaller (figure 5).

The data also suggests that younger investors have mixed liquidity preferences. Despite having shorter investment horizons, they are more comfortable with the unique liquidity restrictions of alternative investments than those at or near retirement age. These investors also tend to hold more assets in their brokerage accounts than in their retirement accounts.