Wall Street may be calling this the golden age of alternative investments but Richard Ennis sees something very different. The retired investment consultant and former Financial Analysts Journal editor just published a scathing new study arguing that hedge funds, private equity, and other alt strategies aren’t pulling their weight. In fact, he claims they’re quietly draining performance from the very portfolios they’re meant to boost. Endowments holding 65% in alternatives underperformed a simple stock-bond benchmark by 2.4% annually over 16 years through June 2024. Pensions, with 35% exposure, trailed by 1%. That shortfall, Ennis points out, suspiciously mirrors the average costs of these vehicles.
His core argument? The complexity of alternatives masks an inconvenient truth: high fees and ordinary returns. Ennis believes the entire system runs more on narrative than numbers and consultants, CIOs, and multi-strategy funds are incentivized to keep the machine humming. Alts bring extraordinary costs but ordinary returns, he writes in The Demise of Alternative Investments, soon to be published in the Journal of Portfolio Management. Despite the underperformance, the asset class continues to balloon. According to Preqin, the alt industry held $17 trillion in assets by end-2023 and could hit $29 trillion by 2029. Firms like KKR (NYSE:KKR), and others now repackaging these vehicles into semi-liquid funds for retail investors, call it a golden age. Ennis calls it something else entirely: a slow-moving cost trap.
Some argue Ennis is cherry-picking the timeline starting in 2009, when stocks ran hot and nearly everything else lagged behind. Others defend alts for reasons beyond return: reducing volatility, hedging inflation, and improving long-term outcomes. But Ennis remains unmoved. To him, passive indexing not private equity or hedge funds offers the most consistent value. And while public market names like Tesla (TSLA) continue to dominate the performance charts, the real story could be that institutions chasing sophistication are paying steep premiums for subpar results.
This article first appeared on GuruFocus.