Pay attention to the man behind the curtain.

While data centers may have become Wall Street’s wizard of alts, there are other, perhaps more mundane, infrastructure opportunities that might deserve a closer look. Demand for energy infrastructure, which was flat for decades, is now growing again amid the needs of artificial intelligence and the shift toward renewable energy. Unfortunately, our current grid is straining to keep up. That opens the door to a broader set of infrastructure plays that are easier for Main Street investors to access than in cycles past, giving advisors new tools to diversify client portfolios beyond the increasingly crowded data center trade.

“We believe data centers are, at least today, somewhat overhyped,” said Irina Zilbergleyt, managing director at I Squared Capital. “They are attracting a tremendous amount of attention, which means a lot of capital is bidding for the same assets and driving up prices. If you win an asset in that environment, there is real risk you have overpaid.”

There’s No Place Like Alts

Developed countries have underinvested in infrastructure for decades, and it’s starting to catch up with them. “We’re seeing a tremendous investment again, somewhat tied to AI, but also because of the lack of upgrade of the infrastructure for a long time,” said Eric Gerster, CIO at AlphaCore Wealth Advisory. Transitioning to renewable energy like wind, solar, and hydropower requires costly grid upgrades, and while traditional US infrastructure often runs through government-bid contracts, private investors still have an opening. Abroad, it’s more direct: Gerster and Zilbergleyt both pointed to international governments selling assets like toll roads outright to private firms, guaranteeing investors a healthy return.

Phil Blancato, chief market strategist at Osaic, broke down how he’s approaching exposure across client types:

• For standard Main Street clients who need full liquidity, Blancato favors commodities funds over infrastructure funds. The two are closely linked (infrastructure can’t be built without commodities), but he says that infrastructure funds are often too broad and carry too much oil exposure, which he called a “fading commodity.”
• Higher net worth clients should consider private equity or private credit funds, in order to invest directly in a physical product.
• Mass affluent clients can get similar direct access through interval funds, which provide more liquidity, and which offer a level of access that wasn’t available during the last infrastructure boom.

Slow and Steady. Advisors shouldn’t think of infrastructure as a total return play, and should make sure the product they’re in generates income, Blancato cautioned. “You do have periods of lackluster returns,” he said. “When you’re not seeing the boom happen immediately or [you’re in] the spheres where it ebbs and flows, having that income strand is key … You want to look at this as a long-term hold.”

“Don’t put all your eggs in one basket,” is a piece of advice that’s easier to give than to follow.

Since 2019, stocks and bonds have often moved in tandem, with the diversification benefits of bonds especially weakening when volatility rises, according to a recent analysis by the International Monetary Fund. But spreading your money out across different types of assets is still an important risk-management strategy for investors. Enter liquid alternative investments that experts say are offering some protection against large losses in the stock market, including equity market neutrals and commodities.

“It does seem like the US equity market keeps chugging along, but it may not continue that way forever,” said Amy Arnott, a portfolio strategist for Morningstar. “So it’s always helpful to have exposure to some assets that have different performance characteristics that could help buffer your losses if the market does go down.”

The Sturdy Baskets

If you’re looking within traditional liquid alternative funds, one category that really stands out as a diversifier is equity market neutral strategies, which balance long and short equity exposure in an attempt to isolate stock-picking skills without taking on as much overall market risk, Arnott said. Over the last three years, their correlation has been -0.3, which is lower than any other Morningstar fund category.

Commodity funds have also been strong diversifiers, with slightly negative to close to zero correlation with the overall market over the past three years. Arnott suggests investors have long-term holdings in a diversified commodity fund with exposure to both energy-related commodities and precious metals like gold. Managed futures funds, which go long on asset classes that are going up and short on those that are going down, are another good pick, she added.

These alts are appealing to advisors:

• Joon Um, an advisor with Secure Tax & Accounting, said his top choice of alts that offer diversification is managed futures because they can profit from trends across commodities, currencies, interest rates and equities, giving them the potential to perform differently than traditional stocks and bonds.
• Jon Lapp with Haven Financial Advisors said his preferred alternative assets have been primarily precious metals over the past few years. “We like gold and silver as a hedge,” he added. “The significant growth of both of them has caused us to rebalance several times, to capture the gains while making sure it remains a complementary holding instead of a core one.”

Risk Benefits Over Returns. Diversification plays often don’t come with the best returns. Equity market neutral funds, for instance, have annualized returns of about 4.1% over the past 10 years, according to Morningstar data. “It’s important for advisors to communicate to their clients, if they do want to add positions in those funds, why they’re doing that and that you probably shouldn’t expect the highest returns,” Arnott said.

What is essential is invisible to the eye.

So said the fox in Antoine de Saint-Exupéry’s classic 1943 novella The Little Prince. He may have been talking about the true meaning of friendship, love and human connection, but the observation also rings true for private market investors. The absence of daily observable prices in the private markets is a longstanding challenge, creating structural issues that increase volatility and costs. It’s also the biggest question when it comes to the asset class’s entrance into 401(k) plans, according to Sheridan Porter, co-founder of FEV Analytics, a private markets technology company providing daily NAV valuations for illiquid private assets.

“We believe that your mom and pop investor deserves access to excellent deal flow in the private markets,” Porter told Advisor Upside. “The challenge is that the reporting standards that have been good enough for institutional LPs aren’t necessarily good enough for retail 401(k) participants.”

Porter is optimistic that asset managers, working with firms like hers, will be able to close the gap between the daily liquidity and pricing needs of 401(k) plans and the more opaque, illiquid nature of private equity (and other alternative asset classes). It will take some time and concerted effort, however, and financial advisors will likely play a key role in educating clients about the pros and cons of holding private assets in their retirement accounts.

Opposites Attract

Put simply, the problem of PE inclusion in retirement accounts is that private markets and 401(k) plans operate on fundamentally different clocks. Private equity was built around periodic valuation and long-duration capital, Porter said, while defined contribution plans were built around daily accounting, daily participant transactions and the expectation that the price attached to an investment is current enough to support those transactions. That mismatch is where firms like FEV Analytics are trying to create an infrastructure layer that “connects the clocks.”

How can they do so? By recognizing that a modern 401(k) private-market product might calculate a daily NAV for its private-market exposure without pretending that the underlying PE fund can be liquidated every day. Investors could be supplied with key information including:

• The latest reported NAV.
• Subsequent cash flows.
• Changes in relevant market, industry and company inputs and other valuation signals.

In theory, the 401(k) investor can then transact against the estimated NAV, while the investment vehicle manages the actual mismatch between participant cash flows and the liquidity of the underlying assets.

When Will PE Hit 401(k)s In Force? Probably not in the next six months, Porter said, but exciting things should start happening within the next several years. “I think you’ll slowly see more and more products coming online before things accelerate in the future,” Porter said. “There are already some daily priced evergreen funds right now. This is the preliminary toe in the water for this market.”