Alternative investments like private equity, hedge funds, and private real estate are often positioned as tools for improving returns, diversifying risk, and reducing reliance on public markets.
But how well have they actually delivered on those promises?
That’s the question at the heart of a recent paper by Richard Ennis, The Demise of Alternative Investments (2025), co-founder of EnnisKnupp and former editor of the Financial Analysts Journal. Drawing on decades of institutional portfolio data, Ennis makes a data-driven case that alternatives have often underperformed after accounting for fees, risk, and portfolio complexity.
As fiduciary advisors, we believe it’s important to take that analysis seriously, not as a final verdict, but as one of many inputs that inform how we evaluate and design long-term portfolios.
The Case for a Closer Look
It’s easy to see why alternative investments drew interest: they offered the prospect of higher returns, broader diversification, and less reliance on public markets. That appeal grew in the years after the financial crisis, when traditional income sources felt constrained and public markets seemed less reliable. But over time, the long-term results have often fallen short of expectations.
Nowhere is the disconnect more apparent than in what investors are paying for these strategies.
The Cost Problem
A diversified portfolio of alternatives may carry annual expenses of 3% to 4% of asset value, including management fees, carried interest, and indirect operating costs. This aligns with findings from recent academic work, such as Lim (2024), who estimates private market investment costs in the range of 5% to 8% annually when including fee drag across major asset classes like buyouts, venture capital, and private real estate.1
By comparison, low-cost index funds often carry expense ratios under 0.10%. For the investor, this translates to paying 30 to 40 times more for exposures that, in aggregate, have not consistently outperformed.
What Have Alternatives Delivered?
Across the major categories of alternative investments, the performance has often lagged expectations:
Private Real Estate
Exposure to real assets like office buildings, apartments, and industrial properties has appeal as a source of income and inflation protection. But performance hasn’t kept up.
The Cambridge Associates Real Estate Index returned 7.0% annually over the last 25 years, compared to 9.5% for the FTSE NAREIT Index—a 2.5 percentage point gap.2
Hedge Funds
These funds pursue a wide range of strategies, from event-driven to macroeconomic trades. The goal is often to generate consistent, uncorrelated returns. But in practice, results have been modest.
Over the past 15 years, the HFRI Fund-Weighted Composite Index returned 4.0% annually vs. 4.5% for a blended public benchmark. After fees, most hedge fund strategies have struggled to add value.3
Private Equity (Buyouts)
Buyout funds purchase and restructure private companies, typically using significant leverage.
On the surface, results have been strong—buyout funds have produced about 20% more wealth than public equities over their lifespan (Public Market Equivalent ≈ 1.2). But once adjusted for risk and leverage, the advantage largely disappears.4
Institutional Case Study: The Endowment Model
University endowments have long been champions of what’s known as the “Yale model”—an approach that emphasizes large allocations to private equity, hedge funds, and other alternatives, often exceeding 60%. Yet since the Global Financial Crisis (2009 onward), these same endowments have underperformed a low-cost indexing strategy by 2.4% annually.5
Public pensions, which average around 35% in alternatives, have underperformed by roughly 1% annually over the same period. When returns are adjusted for market exposure and risk, the entire margin of underperformance correlates with alts exposure.6
Why Has This Persisted?
The continued embrace of alternatives appears rooted more in incentives than in investment logic. Ennis points to the structural role of conflicts:
- Investment consultants and CIOs benefit reputationally and financially from managing complex portfolios.
- Performance benchmarks are often designed by the same agents implementing the strategy and may understate realistic expectations.
- Bonuses are sometimes tied to these benchmarks, reinforcing a misalignment between fiduciary responsibility and compensation.
These dynamics are not limited to pensions or endowments. Family offices and private investors often face similar challenges when complexity becomes a proxy for sophistication.
The Takeaway
The story with alternatives isn’t all bad. There are credible managers and niche strategies that have delivered value. But the big picture matters. Across institutions and investment cycles, alternatives—once seen as a necessary evolution in portfolio design—have too often underperformed once cost and complexity are accounted for.
For families managing significant wealth, especially across generations, the lesson is clear: make sure your portfolio is delivering value—not just additional layers of complication.
That may mean asking harder questions about whether complexity is truly working in your favor.
As with any complex financial decision, it’s wise to consult with a CPA, attorney, or advisor before making changes.
1 Lim, D. (2024). Private Market Fees and Investor Costs. Institutional Investor Research.
2 Cambridge Associates Real Estate Index, FTSE NAREIT Index (1999–2024).
3 HFRI Fund-Weighted Composite Index, Cliffwater Research.
4 Phalippou, L. (2020). "An Inconvenient Fact: Private Equity Returns & The Billionaire Factory."
5 Ennis, R. (2025). The Demise of Alternative Investments.
6 CEM Benchmarking (2023). Public Pension Performance and Alternatives Exposure.
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