The Rise of Retail Investors in Alternative Investments: A Decade-Long Trend


In the ever-evolving landscape of financial markets, one notable shift is becoming increasingly apparent: the growing influence of individual retail investors in the realm of alternative investments. Over the next decade, we anticipate a significant rise in the proportion of retail investors engaging with alternative assets that mirror the historical trends of ETFs, mutual funds, and stock trading. Here at Sweater, we’ve designed a fund structure and technology stack to meet both the needs of fund managers and investor demand. 

Defining the Retail Investor

Let’s first define what we mean by "retail investor." In Sweater’s context, we’re defining a retail investor as a non-professional investor who buys and sells securities as an individual, rather than on behalf of an institution or organization. These individual investors may have smaller capital compared to institutional investors, but their collective impact on the market is far from negligible. In February 2023, retail investors pushed an average of $1.51 billion every day into U.S. stocks, the highest amount ever recorded, according to data from VandaTrack.

Historical Trends in ETFs and Mutual Funds

To understand the trajectory of retail involvement in alternative investments, we can draw parallels with historical trends in ETFs and mutual funds. In the past, these investment vehicles were primarily dominated by institutional players. However, as technology advanced and information became more accessible, retail investors found themselves empowered to participate. This democratization of investment opportunities marked a paradigm shift, and a similar evolution is now underway in the realm of alternative investments.

Exchange-traded funds (ETFs) made their debut in the early 1990s, and for several years, they were primarily utilized by institutional investors. These funds, which track the performance of a particular index, provided institutions with cost-effective ways to gain exposure to various asset classes. However, as the 21st century progressed, ETFs began to gain momentum among retail investors for several compelling reasons including accessibility, liquidity, and diversification. 

ETFs trade on stock exchanges, just like individual stocks, making them easily accessible to retail investors through their brokerage accounts. This increased accessibility led to higher liquidity and flexibility for retail investors, enabling them to buy and sell ETF shares throughout the trading day. ETFs expanded to cover an ever-widening range of asset classes, from equities to bonds, commodities, and more. This diversification attracted retail investors looking to build well-rounded portfolios.

On the other hand, mutual funds have been a staple of investment since 1929. Initially, they were primarily the domain of wealthy individuals and institutional investors. Mutual funds offered a professionally managed, diversified portfolio of stocks or bonds, but they were less accessible to retail investors due to high minimum investment requirements and limited distribution channels. Sound familiar?

Over time, several pivotal developments transformed mutual funds and made them more accessible to retail investors. The introduction of no-load mutual funds eliminated front-end sales charges, making it more cost-effective for retail investors to participate. The proliferation of 401(k) retirement plans, which often include a selection of mutual funds, brought mutual fund investing to a broader range of individuals. In addition, the emergence of online brokerage platforms further opened the doors to retail investors, providing a user-friendly interface to buy and sell mutual fund shares. As the mutual fund industry expanded, it offered a broader selection of fund types and investment strategies, catering to the diverse needs and risk tolerance of retail investors.

The historical evolution of ETFs and mutual funds from being predominantly the playground of institutional investors to becoming accessible and appealing to retail investors underscores the transformative power of technology, accessibility, and transparency. These trends are now echoing in the domain of alternative investments, as increased access to information and user-friendly platforms empower retail investors to explore a broader spectrum of investment opportunities.

Applying Lessons from Stock Trading to Alternative Investments

Individual stock trading transformed with the advent of user-friendly platforms and real-time information. The success of this shift in making stock trading more accessible is a testament to the power of technology and visibility. During Covid, approximately 30 million brokerage accounts were opened in the US between 2020 - 2022 due to advancements in new technologies. In 2021, retail investors comprised 25% of total equities trading volume according to Public’s The Retail Investors Report. And retail investors have stuck around. The Federal Reserve's triennial Survey of Consumer Finances shows that in 2022, nearly 58% of American households owned stock, either directly or indirectly through mutual funds and other investment accounts. Direct ownership of stocks increased "markedly" between 2019 and 2022, increasing from 15% to 21% — making it the largest change on record, the Fed said in its report.

Similar changes in technology and visibility can pave the way for increased retail participation in alternative investments. 

Access to Information and New Technologies

The rise of retail investing can be attributed to several factors, chief among them being increased access to information and the advent of new technologies. With the proliferation of online platforms, investors can easily access data, market analysis, and educational resources. This accessibility has demystified the once complex landscape of investments, making it more inviting for retail investors to explore beyond traditional assets. 

Sweater is leading the charge to demystify alternative investments by offering partners the ability to raise venture capital funds from an unlimited number of retail investors leveraging our all-in-one solution from capital raising to capital deployment. We offer turnkey fund management, from fund launch to full fund operations, using our modern tech stack and APIs to make venture capital seamlessly accessible to the mass retail market.

As we gaze into the future of financial markets, the rise of retail investors in alternative investments appears inevitable. In a recent iCapital survey, advisors reported allocating between 5 and 15% of their client's portfolios to alternatives, with 50% of advisors saying client interest in alternatives has increased in the past two years. We fully expect to see this appetite grow among accredited and retail investors seeking greater diversification with liquidity windows. 

The lessons learned from the evolution of ETFs, mutual funds, and individual stock trading emphasize the profound impact that increased accessibility and technology can have on market dynamics. By embracing these changes and adapting to the evolving needs of retail investors, the landscape of alternative investments is poised for a decade-long transformation that will redefine the composition of market participants. 

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Written by
The Sweater Team
Published on
November 20, 2023
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