Affluent young investors are increasingly opting for alternative investments rather than the conventional stock and bond options.

• If you're a wealthy investor aged 21 to 43, growth-oriented investments are likely your top priority.
• Despite their wealth, investors aged 44 and above generally prefer traditional investments in stocks and bonds.
• Experts advise that it's wise to consider the risks and costs before being interested in alternatives.

Young, wealthy investors don't want their parents' investments.

According to new research from Bank of America, if you're between the ages of 21 and 43 and have at least $3 million in investable assets, your preferred investments are likely not your traditional mix of stocks and bonds.

According to Mike Pelzar, head of investments at Bank of America Private Bank, approximately one-third of young, wealthy investors' portfolios consist of alternative assets such as hedge funds, private equity, and crypto and digital assets.

Less than half of their portfolios consist of traditional stocks and bonds.

Unlike wealthy investors aged 44 and above, who allocate about three-quarters of their portfolios to stocks and bonds and only about 5% to alternative assets such as hedge funds, private equity, and real estate, he pointed out.

Pelzar stated that the two distinct groups have contrasting perspectives on the greatest potential for growth with their investments.

According to Bank of America's research, 93% of younger investors plan to increase their use of alternative investments in the next few years.

Why younger investors have a different outlook

Pelzar explained that much of the difference between younger and older wealthy investors' outlook is due to the types of investments they grew up with.

Pelzar stated that the younger generation has had more exposure to a diverse range of investment options than the older generation did during their development.

After experiencing the financial crisis and dot-com bust, the younger generation may be less trusting of traditional stocks and bonds. However, the recent correlation between equities and fixed income may motivate them to diversify their assets.

"They're looking to spread around the risk," Pelzar said.

Younger, wealthy investors tend to have higher cash allocations, according to research. However, some experts are concerned that having more cash may result in missing out on potential market returns, despite the current elevated interest rates providing the highest returns on cash in over a decade.

Younger investors are more likely to take on the risk of underinvesting, according to Callie Cox, chief market strategist at Ritholtz Wealth Management, who shared her thoughts on the matter with bizfocushub.com.

Younger, wealthy investors who have a lot of their net worth tied up in illiquid alternative investments may benefit from higher cash allocations, according to Pelzar.

What to consider when planning

Another reason why young, wealthy investors may be turning to alternatives is due to the abundance of options available to them.

Douglas Boneparth, a certified financial planner and president of Bone Fide Wealth, stated that there has never been a greater selection of investment opportunities to choose from.

Boneparth, a member of the CNBC FA Council, emphasized the importance of being aware of the potential costs when diversifying to alternatives.

He stated that alternative investments may necessitate your funds to be tied up for a specific duration.

The standard fee arrangement in the hedge fund industry, as well as in venture capital and private equity, is a 2% annual management fee for asset management and a 20% standard performance or incentive fee that applies to profits made by the fund above a certain benchmark.

Management fees charged by investment funds for alternatives may be higher, according to Boneparth.

The bid-ask spread may be larger or more unpredictable for those invested in collectibles, according to him.