The role of Alternatives is changing - from enhancing returns to absorbing risk

Multi-alternative strategies continue to gain traction not because they promise higher returns, but because they rely less on broad market direction and more on differentiated sources of return and income that help dampen overall portfolio risk in a more difficult macro backdrop.

“For many years, a balanced portfolio was doing well,” says Jean-Philippe Renaud, who leads investment strategy for group retirement at iA Financial Group. “But today’s markets are more volatile. Future returns are less predictable. Investors are looking for better ways to diversify.”

The conversation is moving away from access and toward function, specifically how portfolios generate stability when public assets no longer offset one another.

That shift has been building for more than a decade. In private credit, for example, growth is often traced back to the aftermath of the global financial crisis, when tighter regulation constrained bank lending and pushed borrowers toward non-traditional sources of capital. What began as a workaround has since taken on a more durable role. Global private debt assets have expanded from $232 billion in 2007 to $1.9 trillion in 2023, according to Preqin, pointing to demand that extends well beyond a single market cycle.

Within portfolios, the appeal is less about access to niche assets and more about how those assets behave. Real estate, infrastructure and private credit tend to be anchored in contractual cash flows or underlying business activity, rather than daily price discovery.

“Many alternative investments have long-term contracts, physical assets, or private business activity,” Renaud says. “They tend to be less sensitive to daily market swings than publicly traded stocks and bonds.

That difference becomes more visible in stressed environments. Public assets can reprice quickly and often in tandem. Alternatives tend to reprice more gradually, as valuations are driven by underlying cash flows and periodic appraisals rather than continuous market trading.

“The steady stream of income smooths the performance of the portfolio,” Renaud says. “You don’t see the same swings you see in public markets.”

He points to the underlying cash flow as the differentiator.

“If you invest in a toll road, there’s a stream of revenue every day,” Renaud says. “That steady stream of income is what smooths the performance of the portfolio, because you don’t see those swings every day like you see on the stock market.”

From institutional mainstay to broader access

For decades, these characteristics kept alternatives largely within institutional portfolios, where long time horizons and limited liquidity needs made them easier to hold.

“What we saw historically is that bigger pension plans were using those types of investments because of their qualities,” Renaud says. “Now we’re seeing more access being extended to smaller investors.”

That expansion is being driven in part by product design. Alternatives are increasingly embedded within diversified solutions, including target-date structures, allowing investors to gain exposure without having to build allocations independently.

The shift, however, is not just about availability. It reflects a recognition that the role alternatives play in portfolios is becoming harder to replicate through traditional assets alone.

At iA Financial Group, that has meant embedding alternatives into default structures rather than treating them as standalone allocations.

“We included them in our turnkey solutions, like the Attitude portfolios, which are target-date solutions,” Renaud says. “That was the first step.”

The next phase is giving investors more flexibility.

“Now we’re making it even more available for members to invest on an à la carte basis,” he says. “We’re developing products that can suit an investor who is looking to add alternative investments to their portfolio.”

Risk, reframed rather than removed

There is a tendency to frame alternatives in terms of return potential. Renaud takes a different view.

“Alternative investments don’t mean higher return,” he says. “They mean a better return for a given level of risk.”

The distinction is subtle but important. Alternatives are not expected to outperform in every environment. Their contribution is measured over time, through a combination of steadier income and lower volatility.

In practice, that often means fewer sharp drawdowns, even if returns appear more muted in strong equity markets. Over longer periods, that consistency can improve overall portfolio outcomes.

A maturing opportunity set, with limits

As allocations grow, so does the complexity of the opportunity set. Performance, however, remains cyclical. The drawdown in real estate in 2022, driven by higher rates and inflation, underscored that alternatives are not insulated from macro conditions.

“In market drawdowns, alternatives can decline as well, although their magnitude and timing often differ from traditional public markets,” Renaud says.

Manager selection remains central. There is no consistent signal for outperformance, but process and discipline continue to differentiate outcomes.

“What we look for is a strong process, an institutional-level approach,” he says.

The growing allocation to alternatives is often described as a trend. For firms like iA Financial Group, the focus has been less on expanding the menu of investments and more on how those exposures are integrated into portfolios that serve a broad base of members.

“For investors with a longer-term horizon, it’s about diversification and risk-adjusted return,” Renaud says. Alternatives do not remove uncertainty. They change how and when that uncertainty is absorbed within a portfolio.

This article was produced in partnership with iA Financial Group