Morgan Stanley
Wealth Management

6 Opportunities in Alternative Strategies

Mar 25, 2025

In today’s dynamic economic environment, strategies that worked before may not be effective. Alternative investments could play a valuable role in your portfolio.

Author
Paul Jodice, Co-Head of Global Investment Manager Analysis, Wealth Management

Key Takeaways

  • Economic uncertainty and higher-for-longer interest rates pose challenges for traditional investments, making alternative investments like real estate, private infrastructure and private credit appealing for diversification and potential returns.
  • The private infrastructure asset class, for example, is at the forefront of multiple megatrends, driven by significant growth in artificial intelligence and data proliferation.
  • Opportunistic credit may offer investors attractive yields by providing customized financing solutions to companies facing higher-rate debt.
  • Private equity buyout managers may seek operational improvements within their portfolio companies to support continued profit growth.

Even the most seasoned investors face challenges in the current environment. The U.S. economy is coming off of one of the most aggressive monetary policy tightening campaigns in recent memory. While the Federal Reserve has lowered its policy interest rate, resilient economic growth and persistent inflationary pressures have helped to keep longer-term rates elevated, challenging traditional asset classes and investment strategies.

 

In such an environment, where traditional investing playbooks may be less effective than previously, alternative investments can play an important strategic role in certain portfolios.

 

Broadly speaking, alternative investments refers to asset classes that can deliver differentiated sources of return relative to traditional stock and bond investments. They can help diversify a portfolio and serve as an inflation hedge, as well as provide potential income.

 

Here are six strategies that Morgan Stanley Wealth Management’s Global Investment Manager Analysis team believes can guide investors’ thinking on alternatives in the near to intermediate term. 

  1. 1
    Seeking growth in infrastructure and industrial real estate

    Trends in digitalization and deglobalization are creating opportunities in two adjacent sectors: privately owned infrastructure and industrial real estate.

    • Demand for new and expanded digital infrastructure is soaring as rapid growth in artificial intelligence and data proliferation drive the need for more robust power generation and distribution. As an asset class, private infrastructure investing offers stable cash flows and can be more resilient than traditional assets to inflation and higher interest rates.
    • As companies bring production closer to consumers and diversify operations to mitigate geopolitical risks, demand for industrial real estate, such as warehouses and distribution centers, is also surging. These investments offer potential for strong returns, especially in properties that can capitalize on the growing e-commerce market.

  2. 2
    Capitalizing on opportunistic credit

    A surge in corporate borrowing prior to the aggressive Fed rate hikes has left many companies facing increased debt levels and loans coming due in a higher-rate environment. Some companies, especially those unable to secure traditional bank financing, are seeking out customized financing solutions to help them manage these challenges and position their business for future growth. “Opportunistic credit” and “special situations” strategies can help meet the demand from companies while offering investors compelling yields and potential returns, with performance that may complement the traditional investments in a portfolio. 

  3. 3
    Finding value in private equity buyouts

    Following years of easy financial conditions, current higher rates and sticky inflation are making it more important for investors to find companies that can continue to grow revenues and profitability, despite steeper capital costs and margin pressures. Select private equity (PE) buyout funds may be attractive investments in this environment. These funds offer access to investment in the portfolios of firms that typically acquire controlling stakes in companies, taking them private and improving their operational performance before eventually selling them for a profit.

     

    Experienced PE buyout managers can enhance their portfolio companies’ operations by sending in “value creation” teams to deploy better business processes, talent management and technology, often with a focus on AI, to enhance productivity at the companies. Qualified investors should look for funds managed by PE buyout managers with a track record of success in operational improvements. 

  4. 4
    Searching for stability in asset-based finance

    Asset-based finance (ABF) involves lending money secured by assets as varied as infrastructure and real estate debt, aviation and equipment leases, music royalties and intellectual property. For investors, ABF offers stable cash flows and diversification potential due to the wide array of collateral that can be used to secure investments.

     

    ABF investments tend to be more resilient than corporate debt amid higher rates and offer more compelling yields due to their complex lending arrangements and lower liquidity (i.e., the ability to quickly convert assets into cash). What’s more, these investments have shown lower correlations to assets like high-yield bonds, potentially helping reduce risk in a portfolio. 

  5. 5
    Looking for liquidity in private secondaries

    The secondary market in private investments is growing, offering new opportunities for qualified investors. This market allows investors to buy and sell existing investments in private companies, offering liquidity and, in many cases, a chance to avoid the low returns often seen during the early phases of a company’s growth by entering investments at later stages. With more general partners (i.e., managers of private equity funds) using the secondary market to retain valuable assets for longer, there’s a potentially rich pool of quality investments available.

     

    Secondary funds, which specialize in these transactions, have shown strong returns with managed risk. For investors, this can mean access to discounted deals and a chance to invest in a market where demand continues to outstrip supply, potentially leading to significant gains.

  6. 6
    Pursuing alpha with hedge fund strategies

    With interest rates higher than the near-zero levels of the last decade, hedge funds may be an attractive option for qualified investors seeking to diversify their portfolios and potentially enhance returns.

     

    Certain types of hedge funds have historically performed well amid higher rates. They often seek to generate “alpha,” or returns above the market, through strategies involving buying and selling investments to exploit market inefficiencies. “Relative value” hedge funds, for example, might aim to profit from price differences between related securities, while “market neutral” funds might seek to capitalize on movements in securities in ways that minimize market risk. “Macro” hedge funds, meanwhile, might aim to profit from broad economic shifts and help buffer against market volatility.

     

    These strategies typically show low correlations with stocks and bonds, helping reduce risk in a portfolio. This can make them attractive for investors looking to help hedge and grow their capital, particularly in changing or uncertain economic conditions.

i
Alternative investments continue to become more accessible, with a range of registered funds and evergreen vehicles providing exposure to asset classes such as private equity, private credit and private real estate.

Looking ahead: Greater access, liquidity and simplicity

Alternative investments continue to become more accessible, with a range of registered funds and evergreen vehicles providing exposure to asset classes such as private equity, private credit and private real estate. These investments typically feature reduced eligibility requirements, improved liquidity, low investment minimums and simplified tax reporting. Additionally, the emergence of curated portfolio solutions has recently facilitated even easier participation in these asset classes.

 

However, it’s important to recognize that alternative strategies are not all the same, nor are they right for all investors, who need to evaluate return, risk, income and liquidity profiles depending on the investment they are considering.

 

To learn more about how you may be able to incorporate alternative investments into your portfolio, contact your Morgan Stanley Financial Advisor or Private Wealth Advisor.

Questions you can ask your Morgan Stanley Advisor:

  • How can alternative investments help enhance return potential while managing risk in today’s market environment?
  • Which alternative strategies are most appropriate for my investment portfolio and financial goals?

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Alternative Investments Wealth Management Portfolio Insights

Disclosures:

Hedged Strategy Definitions

Equity Long/Short consists of a core holding of long equities hedged at all times with varying degrees of short sales of stock and/or index options. Some managers maintain a substantial portion of assets within a hedge structure and commonly employ leverage.

Equity Market Neutral Equity market neutral strategies employ sophisticated quantitative techniques of analyzing price data to ascertain information about future price movement and relationships between securities, select securities for purchase and sale. These can include both factor-based and statistical arbitrage/trading strategies. Factor-based investment strategies include strategies in which the investment thesis is predicated on the systematic analysis of common relationships between securities. In many but not all cases, portfolios are constructed to be neutral to one or multiple variables, such as broader equity markets in dollar or beta terms, and leverage is frequently employed to enhance the return profile of the positions identified. Statistical arbitrage/trading strategies consist of strategies in which the investment thesis is predicated on exploiting pricing anomalies which may occur as a function of expected mean reversion inherent in security prices; high frequency techniques may be employed and trading strategies may also be employed on the basis of technical analysis or opportunistically to exploit new information the investment manager believes has not been fully, completely or accurately discounted into current security prices. Equity market neutral strategies typically maintain characteristic net equity market exposure no greater than 10% long or short.

Relative Value Investment managers in this strategy maintain positions in which the investment thesis is predicated on realization of a valuation discrepancy in the relationship between multiple securities. They employ a variety of fundamental and quantitative techniques to establish investment theses, and security types range broadly across equity, fixed income, derivatives or other security types.

The Global Investment Manager Analysis (GIMA) Services Only Apply to Certain Investment Advisory Programs.   GIMA evaluates certain investment products for the purposes of some – but not all – of Morgan Stanley Smith Barney LLC’s investment advisory programs (as described in more detail in the applicable Form ADV Disclosure Document for Morgan Stanley Wealth Management). If you do not invest through one of these investment advisory programs, Morgan Stanley Wealth Management is not obligated to provide you notice of any GIMA Status changes even though it may give notice to clients in other programs.

Risk Considerations

Alternative/hedged strategies may use various investment strategies and techniques for both hedging and more speculative purposes such as short selling, leverage, derivatives and options, which can increase volatility and the risk of investment loss.  Alternative/hedged strategies are not appropriate for all investors.  A short sales strategy includes the risk of loss due to an increase in the market value of borrowed securities.  Such a strategy may be combined with purchasing long positions in an attempt to improve portfolio performance.  A short sales strategy may result in greater losses or lower positive returns than if the portfolio held only long positions, and the portfolio’s loss on a short sale is potentially unlimited.  The use of leverage can magnify the impact of adverse issuer, political, regulatory, market, or economic developments on a company.  A decrease in the credit quality of a highly leveraged company can lead to a significant decrease in the value of the company’s securities.  In a liquidation or bankruptcy, a company’s creditors take precedence over the company’s stockholders.

General Alternative Investments Risk - Alternative investments often are speculative and include a high degree of risk. Investors could lose all or a substantial amount of their investment. Alternative investments are appropriate only for eligible, long-term investors who are willing to forgo liquidity and put capital at risk for an indefinite period of time. They may be highly illiquid and can engage in leverage and other speculative practices that may increase the volatility and risk of loss. Alternative Investments typically have higher fees than traditional investments. Investors should carefully review and consider potential risks before investing. Certain of these risks may include but are not limited to:

• loss of all or a substantial portion of the investment due to leveraging, short-selling, or other speculative practices;

• lack of liquidity in that there may be no secondary market for the fund and none expected to develop;

• volatility of returns;

• restrictions on transferring interests in the fund;

• potential lack of diversification and resulting higher risk due to concentration of trading authority when a single advisor is utilized;

• absence of information regarding valuations and pricing;

• complex tax structures, tax inefficient investing and delays in tax reporting;

• less regulation and higher fees than mutual funds;

• fund of funds often have a higher fee structure than single manager funds as a result of the additional layer of fees;

• risks associated with the operations, personnel and processes of the advisor; and

• generally have higher fees and expenses than traditional investment vehicles and such fees can lower the returns achieved by investors

• Individual funds will have specific risks related to their investment programs that will vary from fund to fund. Additional information can be found in the fund’s confidential offering documents.

In addition, the primary risks of investing in private credit include:

• Illiquidity risk – investments in private lending are typically highly illiquid and may require capital to be committed for an extended period of time, i.e. several years;

• Credit / default risk – non-payment of interest and/or or principal payments;

• Interest rate risk – changes in market interest rates are reflected as a change in the spread which loans in a portfolio pay over the base rate (U.S. Treasuries), which in turn impacts the perceived value of the loans in the portfolio and thus the value of the portfolio itself;

• Prepayment risk – loans which are originated with relatively high interest rates may be paid off early if more attractive financing rates can be found; and

• Credit rating analysis risk – many borrowers have not issued other debt which has been rated by a recognized rating organization (e.g. Moody’s, S&P, Fitch), as such the determination of the credit worthiness of such borrowers is dependent on the analysis performed by a portfolios’ managers or advisors.

All expressions of opinion are subject to change without notice and are not intended to be a forecast of future events or results. Further, opinions expressed herein may differ from the opinions expressed by Morgan Stanley Wealth Management and/or other businesses/affiliates of Morgan Stanley Wealth Management.

Alternative investments involve complex tax structures, tax inefficient investing, and delays in distributing important tax information. Individual funds have specific risks related to their investment programs that will vary from fund to fund. Clients should consult their own tax and legal advisors as Morgan Stanley Wealth Management does not provide tax or legal advice and are not “fiduciaries” (under the Employee Retirement Income Security Act of 1974, as amended, the Internal Revenue Code or otherwise) with respect to the services or activities described herein except as otherwise provided in writing by Morgan Stanley and/or as described at www.morganstanley.com/disclosures/dol.

Interests in alternative investment products are offered pursuant to the terms of the applicable offering memorandum, are distributed by Morgan Stanley Smith Barney LLC and certain of its affiliates, and (1) are not FDIC-insured, (2) are not deposits or other obligations of Morgan Stanley or any of its affiliates, (3) are not guaranteed by Morgan Stanley and its affiliates, and (4) involve investment risks, including possible loss of principal. Morgan Stanley Smith Barney LLC is a registered broker-dealer, not a bank.

Private equity interests may be highly illiquid, involve a high degree of risk and be subject to transfer restrictions.

Real estate investments: property values can fall due to environmental, economic or other reasons, and changes in interest rates can negatively impact the performance of real estate companies.

Hedge funds may involve a high degree of risk, often engage in leveraging and other speculative investment practices that may increase the risk of investment loss, can be highly illiquid, are not required to provide periodic pricing or valuation information to investors, may involve complex tax structures and delays in distributing important tax information, are not subject to the same regulatory requirements as mutual funds, often charge high fees which may offset any trading profits, and in many cases the underlying investments are not transparent and are known only to the investment manager.

Investing in stocks entails the risks of market volatility. The value of all types of investments may increase or decrease over varying time periods.

Bonds are subject to interest rate risk.  When interest rates rise, bond prices fall; generally the longer a bond’s maturity, the more sensitive it is to this risk.  Bonds may also be subject to call risk, which allows the issuer to retain the right to redeem the debt, fully or partially, before the scheduled maturity date.  Proceeds from sales prior to maturity may be more or less than originally invested due to changes in market conditions or changes in the credit quality of the

High yield bonds are subject to additional risks such as increased risk of default and greater volatility because of the lower credit quality of the issues. 

Yields are subject to change with economic conditions. Yield is only one factor that should be considered when making an investment decision.

Real estate investments: property values can fall due to environmental, economic or other reasons, and changes in interest rates can negatively impact the performance of real estate companies.

Asset allocation and diversification do not assure a profit or protect against loss in declining financial markets.

Because of their narrow focus, sector investments tend to be more volatile than investments that diversify across many sectors and companies.

Artificial intelligence (AI) is subject to limitations, and you should be aware that any output from an IA-supported tool or service made available by the Firm for your use is subject to such limitations, including but not limited to inaccuracy, incompleteness, or embedded bias.  You should always verify the results of any AI-generated output.

Environmental, Social and Governance (“ESG”) investments in a portfolio may experience performance that is lower or higher than a portfolio not employing such practices. Portfolios with ESG restrictions and strategies as well as ESG investments may not be able to take advantage of the same opportunities or market trends as portfolios where ESG criteria is not applied. There are inconsistent ESG definitions and criteria within the industry, as well as multiple ESG ratings providers that provide ESG ratings of the same subject companies and/or securities that vary among the providers. Certain issuers of investments may have differing and inconsistent views concerning ESG criteria where the ESG claims made in offering documents or other literature may overstate ESG impact. ESG designations are as of the date of this material, and no assurance is provided that the underlying assets have maintained or will maintain and such designation or any stated ESG compliance. As a result, it is difficult to compare ESG investment products or to evaluate an ESG investment product in comparison to one that does not focus on ESG. Investors should also independently consider whether the ESG investment product meets their own ESG objectives or criteria. There is no assurance that an ESG investing strategy or techniques employed will be successful. Past performance is not a guarantee or a dependable measure of future results.

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