2025 marked a year of robust returns in the face of uncertainty – global equities were up over 20%, global fixed income meaningfully outperformed cash and commodities posted their strongest return since 2022. While we remain constructive on the outlook for markets and the economy in 2026, tensions linger beneath the surface.

Equity market concentration is at all-time highs amid elevated valuations. Credit spreads are the tightest they’ve been in years. Economic nationalism and fiscal activism have reignited risks of inflation and interest rate volatility, making positive stock-bond correlation more likely.

That means the old diversification playbook may not be as reliable as it used to be – the traditional 60/40 portfolio may be less likely to provide the stability investors seek to grow their wealth across market cycles. That’s where alternative investments may have a role. Many investors treat alternatives as a tactical portfolio add-on, but we believe they’re a strategic consideration for building resilient portfolios.

We think compelling opportunities in alternatives are centered on three investment themes:

• The next phase of artificial intelligence (AI)
• The quest for portfolio durability
• The evolving liquidity of private markets

Here is how these themes are reshaping the alternatives opportunity set in 2026.

Theme 1: The next phase of AI: Power, energy, AI applications

Over the past three years, companies have committed a meaningful amount of capital expenditure (capex) to building the physical and digital infrastructure needed to support AI’s advancement. We believe the next phase of AI will be defined by solving bottlenecks in power and energy and unlocking value through real-world integration of applications. We also find that private markets are where these innovations are happening.

Surging demand for power at a time of supply constraints, multiyear transmission backlogs, aging infrastructure and resource scarcity (minerals, water) are re-emerging as hard limits to the growth in AI. They are also straining electricity grids, undercutting their reliability and putting upward pressure on power prices.¹

Indeed, the U.S. may reach a power shortfall as early as 2029. This will require investment not only in power infrastructure – generation, transmission and distribution – but also in energy efficiency and infrastructure that improves reliability and reduces peak-load stress, expanding the opportunity set for investors. For example, in the U.S., this is likely to support sustained demand for oil and natural gas, creating secular tailwinds at a time when fundamentals are improving and valuations remain attractive.²

But this is not just a U.S. phenomenon. Globally, electrification, AI-driven load growth and aging grid infrastructure are converging to create similar reliability and capacity constraints, making investment in both firm energy supply and grid efficiency a worldwide imperative.

AI companies are also developing applications that improve their customers’ growth potential, delivering productivity, revenue and in some cases profitability gains. Agentic AI has the potential to make decisions and operate independently of constant human input. AI-enabled enterprise software can automate core business functions. Vertical AI solutions offer purpose-built tools tailored for specific industries. Estimates suggest these could represent a $6 trillion market by 2030.³

While it is still early days, one study found that AI-forward companies are growing revenues 1.7 times faster than AI laggards and expanding margins 1.6 times faster. Should this trend continue to materialize, investors may start to punish the laggards, especially heritage software companies they perceive are not evolving quickly enough to benefit from AI.

But the most important takeaway for investors is this: The majority of applications are currently emerging primarily in private markets. Investors could be missing meaningful growth and innovation opportunities if they don’t have exposure to private markets through venture capital and private equity.

Here’s how investors may consider accessing these opportunities:

• Agentic AI: Best suited for venture capital funds. Agentic AI is still in an experimental and fast-evolving phase, requiring patient capital, long research and development (R&D) cycles, and risk-tolerant backing.
• Vertical AI solutions: We believe both venture capital and growth equity managers will play critical roles supporting early-stage innovation, especially where a product’s fit for its market, and its distribution, are still being tested. Growth equity should also be crucial in helping proven companies scale up, professionalize and find more customers.
• AI-enabled enterprise software: Growth equity and buyout investors will likely provide the operational expertise, capital and strategic discipline to help AI-enabled software platforms scale efficiently.

To be sure, three years into the AI cycle, some isolated pockets of froth have begun bubbling up. We expect ebbs and flows in the sector’s fortunes over the next decade, and we’re carefully monitoring for signs of a bubble – but we continue to believe our clients face greater risk from underexposure, not overexposure.

Theme 2: The quest for portfolio durability

Building a resilient portfolio today means going beyond traditional equities and bonds. With “tech plus”⁴ now making up nearly 50% of the U.S. equity market, leaning into less correlated, differentiated return streams is more important than ever.

For those seeking greater portfolio durability in 2026, we favor core private equity (leaning on geographic and sector diversification), “diversifying the diversifiers” through hedge funds and infrastructure, and complementing senior secured direct lending with other pockets of credit. Careful manager selection will be critical across the board as dispersion widens.

Core private equity

Core private equity (PE) may play a critical role in portfolios in 2026 and beyond as a source of differentiated returns. To boot – we believe returns will be supported by robust earnings growth, resurgence in dealmaking activity as financial conditions ease and a revitalization of the PE playbook (e.g. carve-outs, operational improvements).

Geographic diversification is critical

We are constructive on Europe, India and Japan. While European public markets have lagged U.S. public markets for over a decade, the median European PE buyout fund has outperformed its U.S. peers and the public market benchmark.⁵ Europe’s fragmented markets, operational complexity, abundance of middle market companies and fewer funds in competition are driving this trend. European buyout funds should continue offering investors greater exposure to long-term themes than public markets do: Tech and telecom account for about one-third of deal activity versus roughly one-tenth of the MSCI Europe companies’ market cap.⁶

India is one of the Asia-Pacific region’s fastest-growing PE markets. Deal activity continues to accelerate, driven by strong economic growth, rising consumer demand, global supply chain shifts and burgeoning institutional interest. In Japan, corporate carve-outs – firms spinning off a division or business unit – and corporate governance reforms accelerate deal activity.

Sector diversification

We favor health care and security alongside traditional tech. While we remain constructive on tech PE given the opportunity in AI, there is meaningful innovation in health care, including precision medicine and advanced diagnostics. Security themes, such as energy security, supply chain resilience and defense technology, are a growing opportunity. Sports may have potential to provide a source of robust returns that are less correlated to public markets.

Diversifying the diversifiers

Hedge funds and infrastructure can help buffer against the risk of equity market concentration and higher likelihood of positive stock-bond correlations.

Hedge funds delivered in 2025. Seven out of eight hedge fund segments⁷ were in the green, and discretionary macro hedge funds gained over 10%,⁸ outpacing traditional fixed income. Macro hedge funds in particular have been a critical diversifier – negatively correlated to both tech stocks and the 60/40 portfolio while also providing positive returns during major market drawdowns.

We anticipate this pattern to continue, given prevailing conditions of elevated rates, volatility and performance dispersion by sectors and assets that create more chances for hedge fund managers to find opportunities in mispricings. Importantly, hedge funds can give investors the opportunity to diversify without sacrificing absolute returns.

Infrastructure also stands out: As of December, yields averaged around 6%, about 2 percentage points above the 10-year Treasury. Infrastructure returns have been historically consistent during inflation regimes, are backed by multiyear cash flows and are supported by a long-term trend: Resilient infrastructure is now a matter of national security.

Credit complements

We expect direct lending⁹ yields in the United States to return to historical ranges (8%–10%). Within direct lending, we prefer higher-quality loans at the top of the capital structure (senior-secured) and larger company borrowers (EBITDA over $50 million). Europe is starting to look more attractive: The market is less trafficked, lenders face less competition from banks and yields maintain a healthy premium over public credit markets. Overall, we expect performance dispersion in this space to widen in 2026, so manager selection is critical.

We believe complementing direct lending with other pockets of credit will be critical to portfolios in 2026 and beyond as yields normalize and pockets of stress emerge. Consider asset-backed credit, which offers higher yields than public markets, supported by an illiquidity (complexity) premium, a large total addressable market (TAM),¹⁰ less competition and a diversified collateral pool. Another diversification option: real estate.

Also consider taking advantage of “micro” credit cycles that emerge in 2026 as growth may be uneven across industries and disruption from AI creates cracks in pockets of software,¹¹ through opportunistic/distressed credit managers that seek out dislocations.

Theme 3: The evolving liquidity of private markets

Private market liquidity is evolving fast.

Evergreen fund structures will likely alter the private market landscape. As of 2025, around 20% of our private bank alternative investment assets under supervisory were in evergreen vehicles (four times the level five years ago).

As private markets mature, we expect asset owners will find more opportunities for liquidity beyond the traditional avenues of initial public offerings (IPOs) and strategic mergers and acquisitions (M&A). Secondary markets¹² are a key part of this maturation as private equity assets continue to age. The median holding period for global buyout PE funds is elevated (at more than six years). Continuation vehicles, which are new funds created by PE general partners to hold portfolio companies, now account for nearly 20% of global PE exits.¹³

These structural shifts are unlocking new ways for limited partners (LPs) and general partners (GPs) to manage liquidity and add diversification to portfolios.

Where are the opportunities?

• LP-led secondaries: Institutions’ growing adoption of these transactions, and active portfolio management, are driving increased volume in secondaries. This market offers investors access to seasoned, diversified portfolios with shorter duration and greater cash flow visibility than traditional core PE.
• GP stakes and solutions: The prevalence and value of GP solutions – such as GP stakes and continuation vehicles – are trending higher. We believe there is a growing opportunity in GP-led secondaries as market growth accelerates. GP stakes provide investors access to the institutionalization and scaling of alternative asset managers.
• Secondary specialists: Secondaries are moving beyond private equity – we believe there is a growing opportunity set in venture capital (VC) and infrastructure markets. Some estimates show that by 2030, VC and growth LP secondaries will surpass $100 billion TAM,¹⁴ and infrastructure secondary volumes could triple to about $30 billion.

The private market liquidity landscape continues to evolve, driven by aging assets and growing evergreen funds. Investors should consider maintaining a balance between drawdown and evergreen structures as they build out their private equity portfolios, while also exploring investments in secondaries.

The bottom line: Alternatives as features of dynamic, resilient portfolios

The promise and pressure of 2026 are not about chasing the next rally or hedging against the next drawdown. They are in recognizing that so many old boundaries have collapsed – between public and private, between equity and alternatives, between efficiency and resilience.

To us, this means alternatives are an important consideration. We believe in the uncomfortable truth, that the risks of concentration and correlation are rising. Portfolios allocated strictly to stocks and bonds may run the risk of obsolescence. The way forward is to build portfolios as dynamic, resilient and innovative as the world they must navigate.