Alternative Investments: How to Size Them, What They Cost, and How Liquid They Really Are

Alternatives are having a moment with individual investors. In August 2025 the SEC dropped a 23-year-old staff position that had kept retail-friendly closed-end funds from putting more than 15% of assets into private funds. In March 2026 the Department of Labor proposed a safe harbor that would make it easier for 401(k) plans to offer private assets. Fund sponsors have launched a stream of "evergreen" and "semi-liquid" products aimed at people with a few hundred thousand dollars rather than institutions with a few billion.

Then, in the first half of 2026, investors in several of the largest non-traded private credit funds asked for their money back faster than the funds would pay it. That episode is the best short lesson in what alternatives involve: different returns, yes, and also different liquidity, fees, valuation, and taxes. This guide covers each of those so you can decide whether any of it belongs in your portfolio and how much.

What falls under "alternatives"

Our deeper guides cover private equity for individuals, private credit, hedge fund strategies, private real estate funds, REITs, infrastructure, commodities, and fine art.

Who can invest in what

The rules decide which products you can buy, so start here.

• Accredited investor. Net worth over $1 million excluding your primary residence, or income over $200,000 ($300,000 jointly) in each of the past two years with the same expected this year. Series 7, 65, and 82 license holders also qualify. This opens most private placements. The House passed the INVEST Act in December 2025, which would add a knowledge-exam route, but it had not become law as of September 2026.
• Qualified client. Needed before an adviser can charge you a performance fee. The SEC raised the thresholds for new relationships from June 29, 2026 to $1.4 million managed by the adviser or net worth over $2.7 million.
• Qualified purchaser. Generally $5 million or more in investments for individuals. Many larger private funds are limited to this group.
• Everyone else. Listed REITs, listed BDCs, commodity ETFs, liquid alternative mutual funds, interval funds, and many non-traded REITs and BDCs (subject to state suitability rules).

One change that affects how you prove status: since a March 2025 SEC staff letter, issuers raising money under Rule 506(c) can treat a $200,000 minimum investment plus your written representation as reasonable verification, instead of asking for tax returns or bank statements. It makes it easier for sponsors to advertise offerings to you, and it does nothing to make those offerings safer.

Liquidity: read the redemption terms first

"Semi-liquid" funds promise periodic exits, but with limits. Non-traded BDCs and non-traded REITs usually offer to repurchase up to about 5% of shares per quarter, and boards can cut or suspend that. Interval funds must offer repurchases of 5% to 25% of shares at set intervals.

The limits held in 2026. Per With Intelligence, redemption requests at the largest non-traded BDCs averaged 12.1% of shares in the first quarter, well above the usual 5% cap, and most funds paid out pro rata. The CAIA Association pointed out that the gate worked as designed: requests surged, actual withdrawals stayed capped. That is little comfort if you needed the money. Real estate went through the same thing earlier, when Blackstone's BREIT limited withdrawals from December 2022 and took until early 2024 to meet requests in full.

Before buying any semi-liquid fund, find in the prospectus: the repurchase limit, whether the board can suspend it, whether there is an early-withdrawal fee (often 2% in the first year), and the price used for repurchases.

Capital calls in drawdown funds

Traditional private equity, venture, and many private credit funds work on commitments. You sign for an amount, and the manager draws it over roughly three to five years, usually with about 10 business days' notice. Distributions come later as investments are sold. Missing a call is serious: fund documents typically let the manager charge interest, force a sale of your interest at a discount, or forfeit part of it.

An illustration: you commit $250,000. A plausible pattern is calls of $50,000 in year 1, $62,500 in years 2 and 3, $37,500 in year 4, and $25,000 in year 5, a total of $237,500, with meaningful distributions starting around year 4 or 5. Your net cash flow is negative for several years. If a stock market drop coincides with year 2, you still owe $62,500.

A simple rule many investors use: keep the next 12 to 24 months of expected calls in cash or Treasury bills, and never count on distributions from one fund to meet calls from another. Staggering commitments across several years (vintage diversification) also avoids putting everything to work at one point in the cycle.

Fees: the gap is large

Private funds typically charge a management fee of 1% to 2% and a performance fee of 10% to 20% of profits, often above a hurdle. Feeder and fund-of-funds structures add another layer.

An illustration with rounded numbers: a fund earns 15% a year gross. A 1.5% management fee brings that to 13.5%. A 20% carried interest on profits takes 2.7 points, leaving about 10.8%. That is about 4.2 percentage points a year of fees, against roughly 0.05% for a broad index fund. Real fund waterfalls, hurdles, and fee bases differ, so ask for the fund's own net-of-fee figures and its fee examples.

Manager selection matters much more in private markets than in public ones because the gap between good and bad managers is wide. An average private fund, after fees, may not beat a cheap index fund. If you cannot get into managers with long, audited records, the case for private equity weakens a lot.

Smoothed returns and "diversification"

Private assets are marked to appraisals, usually quarterly. That makes reported returns look calmer and less correlated with stocks than the underlying companies or buildings really are. AQR's Cliff Asness has called this "volatility laundering." A private equity fund owning leveraged software companies is still exposed to the same forces as public software stocks; the losses just show up later and smaller on the statement.

Real diversification comes from what an asset owns and how it earns money. Commodities, some trend-following and macro strategies, and certain infrastructure assets do behave differently from equities at times. Private equity and most private credit are mainly equity and credit risk with a different valuation method.

The same point affects rebalancing. After a stock market fall, your private holdings will look like a larger share of the portfolio because their marks lag, and you cannot sell them to rebalance anyway.

Taxes

• K-1s. Partnerships issue Schedule K-1s, often after April 15, so many investors in private funds file extensions every year.
• UBTI in IRAs. Leveraged or operating-business income inside an IRA can be unrelated business taxable income. More than $1,000 of gross UBTI requires the IRA to file Form 990-T and pay tax.
• Collectibles. Long-term gains on art, coins, and physically backed precious metals ETFs are taxed at up to 28%, not the usual 15% or 20%.
• Futures funds. Regulated futures contracts are marked to market each year and taxed 60% long term and 40% short term under Section 1256, whether or not you sold.
• REIT dividends. Mostly ordinary income, though the 20% qualified business income deduction for REIT dividends was made permanent in 2025.

What changed in 2025 and 2026

• Closed-end funds. SEC staff guidance ADI 2025-16 (August 2025) ended the practice of limiting registered funds with more than 15% in private funds to accredited investors with $25,000 minimums. Expect more of these funds, with layered fees.
• 401(k) plans. Executive Order 14330 (August 2025) led to a Department of Labor proposed rule in March 2026 that would give plan fiduciaries a process-based safe harbor when choosing investment options, including private assets. Comments closed June 1, 2026. It was still a proposal as of September 2026, and each employer will decide whether to offer anything.
• Qualified client thresholds rose on June 29, 2026, as above.

Deciding how much, if any

There is no correct percentage. University endowments hold large private allocations because they have perpetual horizons and steady inflows; most households have neither. A more useful test is liquidity: add up the money you may need over the next five years plus any uncalled commitments, and check that your liquid assets cover it even after a 30% to 40% stock market fall.

Alternatives are usually a poor fit if you:

• carry high-interest debt or lack an emergency fund
• might need the money within five to ten years
• cannot evaluate managers or access ones with long audited records
• would be better served by a low-cost index fund portfolio, which describes most people

If you go ahead, liquid public versions (listed REITs, listed infrastructure, commodity ETFs) are the lowest-friction start. Semi-liquid funds come next, with the redemption terms read carefully. Drawdown funds suit investors with large portfolios, spare liquidity, and a long horizon. Before committing, it is worth running the numbers with a fee-only fiduciary adviser.

This guide is for informational purposes only and does not constitute financial, investment, tax, or legal advice. Alternative investments involve significant risks, including loss of capital, illiquidity, and high fees. Consult qualified financial, tax, and legal advisors before investing.