The democratization of alternative investments: for a greater diversification

Alternative investments are attracting increasing interest from both novice and seasoned investors. Traditionally the preserve of a financial elite, alternative investments are becoming increasingly accessible, and this raises an essential question: should access to this asset class be made more widely available? And if so, why?

Alternative investments encompass a wide range of strategies, including hedge funds, private equities, commodities, real estate and many others. They differ from traditional investments, such as stocks and bonds, in that they are less liquid and offer the potential for higher returns. However, this promise of higher returns is usually accompanied by increased complexity and limited access for average investors. Indeed, alternative investments such as private equity or hedge funds often still have high investment thresholds, as they require portfolio management expertise to value and manage these assets.

Why, then, should we consider making alternative investments more accessible?

1. For greater portfolio diversification

Diversification is one of the pillars of effective portfolio management. Alternative investments offer lower correlation with traditional markets, which means they can act as a buffer in the event of stock market volatility. Popularizing access to these investments offers investors the opportunity to allocate their assets in a more balanced way.

2. For controlled risk management

Alternative investments offer more sophisticated risk management strategies. They are often designed to minimize risk and optimize return. The democratization of these tools enables individual investors to better manage their risk exposure.

3. To increase return opportunities

Alternative investments have the potential to generate higher returns than traditional assets. However, access to these opportunities has long been reserved for institutional and high-net-worth investors. Popularizing access allows individual investors to benefit from these returns.

4. Because financial innovation makes it possible

The advancement of technology is a key factor in democratizing alternative investments. Innovative technologies, like tokenization, have the power to enhance accessibility by reducing investment thresholds, increasing liquidity, and eliminating geographical limitations.

But what challenges do financial institutions face in democratizing this offer?

1. Regulatory compliance

Alternative investments are often subject to strict regulation due to their complexity and risks. Financial institutions must comply with legal and compliance requirements.

2. The need for specialized expertise

Alternative investments require specialized expertise to assess opportunities and risks. Financial institutions therefore need to train their staff or partner with external experts.

3. Risk management

Alternative investments can be volatile. Risk management mechanisms must therefore be put in place to protect their clients' interests.

4. The need for liquidity

Some alternative investments, such as private equity funds, have longer investment horizons, which can pose liquidity challenges for customers.

5. Customer communication & transparency

Customers need to understand alternative investments. Financial institutions need to communicate transparently about costs, performance and associated risks.

From which players can we draw inspiration in terms of democratizing alternative investments? 

1. Revolut

This neobank offers a mobile app that enables users to invest in a variety of products, including cryptocurrencies and precious metals, providing simplified access to alternative investments. 

2. Realit

This real estate tokenization platform offers fractional real estate investments, enabling retail investors to buy shares in real estate. 

3. Startengine

This crowdfunding platform gives investors the opportunity to invest in private start-ups, opening the door to venture capital investments.

4. BNP paribas

BNP Paribas has launched alternative investment funds accessible to retail investors, broadening their range of investment products.

5. Deutsche bank

Deutsche Bank offers alternative investment products, including real estate funds, which are accessible to retail investors.

While popularizing access to alternative investments brings undeniable benefits, such as democratizing investment and broadening financial opportunities, it is imperative to strike a balance between accessibility and investor protection. The future lies in a prudent, regulated approach, enabling more people to benefit from alternative investments while guaranteeing their financial security. This can strengthen customer loyalty, open up new sources of income and help achieve financial goals in a more diversified way. Ultimately, adapting to the growing demand for alternative investments can help strengthen banks' position in an ever-changing financial environment.