Alternative investments — a broad category that includes private equity (ownership stakes in privately held companies), hedge funds (actively managed pooled investment vehicles that may use complex strategies including leverage and short-selling), private credit and real assets such infrastructure — can serve a meaningful role in a well-constructed portfolio, but they require careful evaluation before inclusion.

Why It Matters

For decades, alternative investments were accessible only to large institutional investors such as endowments and pension funds. Over the past generation, regulatory changes and the expansion of the wealth management industry have made certain alternatives available to a broader class of accredited investors — generally defined as individuals with a net worth exceeding $1 million, excluding a primary residence, or income above specific thresholds.

This expanded access has raised an important question for business owners, families, and individuals managing significant wealth: does broader availability make these instruments appropriate? Availability and suitability are distinct considerations, and conflating them is one of the more common errors in personal financial lore.

What to Know

Private equity typically involves investing capital into privately held companies with the expectation of realizing gains over a multi-year horizon — often five to ten years or longer. Unlike publicly traded securities, private equity investments are illiquid (meaning they cannot be readily sold on an exchange), and the timing of distributions is controlled by the fund manager rather than the investor. This illiquidity premium — the additional compensation investors expect for accepting reduced flexibility — is a central part of the theoretical case for private equity in a portfolio.

Hedge funds operate across a wide spectrum of strategies, from relatively conservative arbitrage approaches to highly leveraged directional bets on markets, currencies, or commodities. Their fee structures have historically been substantial, and their performance relative to publicly available market exposure varies considerably by fund, manager, strategy, and market environment. Private credit — loans made to companies or individuals outside of the traditional banking system — has grown significantly as an asset class and carries its own distinct risk profile, including credit risk and limited liquidity.

Key Considerations

Liquidity needs are perhaps the single most important consideration when evaluating alternatives. A business owner who may need to draw on capital during an economic downturn, a family navigating a transition such as a business sale or estate settlement, or an individual relocating from a high-tax state such as New York to Tennessee or Florida may have near-term capital requirements that make multi-year lockups genuinely problematic. Advisors operating under a fiduciary (a legal standard requiring the advisor to act in the client's best interest at all times) standard must evaluate illiquidity risk in the context of each client's full financial picture.

Fee transparency is another material concern. Alternative investments frequently carry layered fee structures — management fees, performance allocations, and fund expenses — that can meaningfully affect net returns. A discerning investor should request and review detailed fee documentation before committing capital. Similarly, the complexity of tax reporting associated with certain alternatives, particularly those structured as partnerships, can add administrative burden and cost, a consideration that takes on added relevance for families in Tennessee and Florida who have often relocated precisely to simplify their tax situation.

How Families Typically Approach This

Families with considered, long-term financial plans tend to evaluate alternatives not in isolation but as part of a broader asset allocation framework. A CFA charterholder (Chartered Financial Analyst — a globally recognized investment credential held by only roughly 15% of investment professionals worldwide) will typically assess whether an allocation to alternatives serves a specific portfolio function — diversification, income generation, inflation protection, or growth — rather than adding complexity for its own sake.

A common framework involves reserving alternative allocations for capital that is genuinely long-term in nature — assets that will not be needed for ten or more years and that represent a defined portion of a larger, liquid portfolio. Families who have recently relocated, completed a business liquidity event, or are navigating an intergenerational wealth transfer often revisit their allocation frameworks during these transitions, as their liquidity needs and risk tolerance may have shifted materially. The approach to alternatives at Skela Financial reflects this broader philosophy of stewardship, as described on the firm's philosophy and approach page.

Frequently Asked Questions

What is the difference between private equity and a hedge fund?

Private equity involves investing in companies that are not publicly traded, typically with the goal of growing or restructuring them over a period of several years before selling the position. Hedge funds, by contrast, are pooled investment vehicles that can invest across a wide range of asset classes and strategies — including public equities, fixed income, currencies, and derivatives — and often, but not always, have shorter investment horizons. Both structures typically limit participation to accredited investors, but their risk profiles, liquidity terms, and fee arrangements differ substantially.

Are alternative investments appropriate for someone who recently sold a business?

A business sale liquidity event can make alternatives worth examining, but it also introduces new planning priorities — including tax planning, estate structuring, and establishing reliable income streams — that may require liquid, accessible capital in the near term. Before committing to illiquid alternatives, a business owner who has recently achieved liquidity would typically benefit from establishing a comprehensive financial plan that maps out cash flow needs, tax obligations, and long-term goals. The role of alternatives, if any, generally becomes clearer once that foundation is established.

How much of a portfolio should be allocated to alternatives?

There is no universally correct allocation, and any figure must be evaluated in the context of an individual's total wealth, liquidity requirements, tax situation, and investment objectives. Institutional investors such as university endowments sometimes allocate substantial portions of their portfolios to alternatives, but they operate without the personal liquidity constraints that most families and individuals face. For individuals, a prudent approach often involves sizing alternative allocations conservatively and ensuring that the remaining portfolio provides sufficient flexibility for life's contingencies.

What tax considerations apply to alternative investments?

Many alternative investment vehicles, particularly private equity and hedge funds structured as limited partnerships, issue a Schedule K-1 rather than a standard Form 1099 at tax time. K-1 reporting can be complex, is often delayed relative to standard tax documents, and may involve income characterized across multiple categories including ordinary income, capital gains, and sometimes unrelated business taxable income. Families and individuals considering alternatives should discuss the tax reporting implications with both their financial advisor and a qualified tax professional before investing.

Do alternative investments perform better than traditional stocks and bonds?

This question is difficult to answer in a generalized way, and any advisor who provides a confident blanket answer deserves scrutiny. Performance across alternative investment categories varies enormously by manager, strategy, vintage year, and market environment. The meaningful comparison is not simply gross returns but risk-adjusted, fee-adjusted net returns relative to an investor's specific objectives and constraints. Private equity benchmarking, in particular, is a technically complex field, and marketed performance figures do not always reflect the experience of typical investors in those funds.

This article is for educational purposes only and does not constitute investment, tax, or legal advice. Skela Financial, LLC is a registered investment advisor in the states of Tennessee and Florida. Individual circumstances vary and require personalized analysis before any financial decision is made.

Skela Financial is a registered investment advisor based in Tennessee and Florida, providing portfolio management, wealth stewardship, and bespoke financial planning to business owners, families, and individuals nationwide.