Rethinking Asset Allocation

By Aneet Deshpande | Chief Investment Officer, Clearstead
July 7, 2025

Asset allocation has evolved over the years from primarily consisting of publicly traded equity and fixed income assets to eventually including alternative assets – a catch all category encompassing hedge funds, private market assets and other investments such as commodities. The wealth management industry today generally approaches asset allocation within this traditional framework of categorizing investments as either equity, fixed income, or alternatives. This framework often obfuscates the real purpose of an investment within a client portfolio causing confusion, lack of clarity, and unnecessary complexity. As the investment universe available to advisors continues to evolve, arguably increasing in complexity, now might be a good time to rethink this framework. Just as asset classes and investment options have evolved, perhaps so must the way we categorize and think about them.

Traditional approaches tend to be fine where the investable universe for a client portfolio is limited to publicly traded securities such as public equity and public fixed income. However, the idea that private equity and private debt, for example, should be categorized as alternatives misses the mark with respect to the purpose of their inclusion in a client portfolio. This is where the pivot needs to happen. In capital markets, investors can own (equity) or lend (debt), be that publicly traded or private market securities. It is really not more complicated than that. Adding the amorphous category of alternatives in the traditional approach does not portray the purpose for the investments that ultimately end up in this bucket such as private equity, private credit, real assets, or hedge funds – each of which represent very different fundamental factors, though sharing the element of illiquidity which becomes the sole factor for categorizing the asset class as an alternative. Categorizing assets solely on the basis of (il)liquidity or “I don’t know” seems inadequate.

One way to make the intention of an investment in a portfolio clearer is to view it through the lens of its purpose. So, it seems that a purpose driven framework might be more relevant in a world where the industry continues to increase allocations to private markets as well as to frontier/emerging asset classes such as digital assets. The purpose driven framework seeks to align investments with their fundamental purpose. Examples of this can be seen in private equity and public equity where both are exposed to similar macroeconomic principles while serving the same purpose in an investment portfolio – to grow the real value of a client’s assets. Casting these into separate categories of alternatives and public equity ignores the intrinsic point for portfolio inclusion – as they are both “growth assets”. The same can be said for many private credit strategies that tend to be focused on delivering returns through income (rather than capital appreciation), much like traditional fixed income securities. We can argue here that rather than separating these into alternatives and fixed income that both are categorically “income assets”. Capturing the purpose of an asset class will also cause portfolio introspection as to why investments are being added to client portfolios and the exercise of categorizing investments as either “growth assets” or “income assets” can be a useful tool in the evaluation of the increasing array of investment solutions available to advisors. Whatever the choice of categories, the old way needs to adapt.

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