Article by Klaus A. Wobbe, Founder & CEO at Intalcon
Alternative investments – often promoted as the holy grail of diversification and outperformance – are at the heart of a powerful critique. Richard M. Ennis, a veteran of institutional investment analysis, delivers a sobering verdict in his latest paper, 'The Demise of Alternative Investments' [1]: High costs, weak risk-adjusted returns, and governance structures that favor complexity over clarity. Time to reflect – and draw clear conclusions.
Alternative Investments: The Price of Illusion
According to Ennis, managing a diversified alternatives portfolio costs between 3% and 4% annually – compared to less than 0.1% for index funds. And what do you get in return? Mostly the same underlying risks as stocks and bonds – just wrapped in opacity and illiquidity. As David Swensen once put it: 'It’s just basic arithmetic. It’s not complicated.'
What Do Alts Really Deliver? Spoiler: Less Than Promised
Ennis reviews the three core pillars of alts – private equity, hedge funds, and real estate – with striking clarity:
- Private equity delivers ~20% more than the S&P 500 in PME terms, but with a beta of 1.8, this is risk, not alpha.
- Hedge funds have underperformed public market benchmarks since 2008.
- Private real estate has lagged REITs by about 2.5 percentage points annually.
This might be forgivable – were it not for the extraordinary costs involved.
Systemic Underperformance: The Portfolio-Level Impact
In a 16-year analysis of 50 U.S. public pension funds, Ennis finds a striking pattern: every 1% increase in alts reduces excess return by 7 basis points. A portfolio with 40% in alternatives underperforms by about 2.8 percentage points – every year. This isn’t bad luck. It’s structural.
Why Doesn’t Anything Change?
The answer lies in incentives. CIOs and consultants profit from complexity, from designing 'easy-to-beat' benchmarks, and from performance bonuses based on relative – not absolute – success. The costs are borne by someone else: students, retirees, and taxpayers.
Agency problems, not investment logic, keep the machine running.
Conclusion: The Quiet Shift Has Already Begun
The allure of alternatives is fading. Ennis doesn't just crunch numbers – he reminds us of a truth often overlooked in institutional investing: complex doesn’t mean better. Many institutions are slowly adjusting – favoring liquidity, transparency, and efficiency.
The shift won’t be swift. But it’s underway. And that might be the most powerful outcome of Ennis’ paper: a return to pragmatism and fiduciary clarity. Because anyone investing for the long run should ask: What does it cost – and what does it actually deliver?
I recommend that you read the full article “The Demise of Alternative Investments” by Richard M. Ennis on his blog.
