Are Alternative Investments Worth It? Risk, Returns, and Fees Comparison
Alternative investments, such as venture capital and private equity funds, have long been marketed as the sophisticated choice for savvy investors. They promise higher returns and a way to diversify by offering low correlation to public markets. With enticing claims and an aura of exclusivity, it’s easy to see the appeal. But when you dig deeper, the reality often tells a different story.
The Allure of Alternatives: The Opacity Problem
Proponents of alternative investments frequently highlight their potential to outperform public market benchmarks while exhibiting behavior that moves independently of traditional stock and bond markets. On the surface, this can make alternatives seem like an ideal strategy, but reality often tells a different story. These claims frequently hinge on cherry-picked data, illiquid holdings that are difficult to value regularly, and opaque performance metrics that don’t always align with what’s promised.
This lack of transparency can distort how returns and risk are measured. For instance, when evaluating alpha (excess returns above a benchmark) and beta (volatility or market risk against a benchmark), underestimating beta—often due to stale or infrequent pricing—can lead to an overstatement of alpha. This is especially common in venture capital and private equity, where valuations may not be updated regularly or consistently.
If valuations are based on limited or outdated information, comparisons to public benchmarks become unreliable. Even a modest lag in valuation updates can have a significant impact on reported returns and observed volatility.
If venture capital and private equity were updated with daily prices, their true volatility would likely mirror, or even exceed, that of public stocks. This makes it difficult for investors to accurately assess how these asset classes fit within their broader portfolio and align with long-term financial goals.
In addition, VC and PE funds often highlight their biggest “winners,” like a unicorn exit, while downplaying losses or write-offs. This creates the illusion of consistent outperformance, even though returns are usually driven by just a few standout investments.
While private assets can still offer diversification benefits, those advantages may be diminishing as valuation methodologies improve and become more comparable to public market standards. Greater transparency is a double-edged sword—it can improve decision-making but also reveal that many assumed benefits of alternatives were more about perception than reality.
The True Costs
One of the biggest drawbacks of alternative investments is the cost to participate. Many of these strategies operate under a “2 and 20” fee structure: 2% annual management fees and 20% of any profits. Even though the fees can be reduced in later years, these fees can significantly erode net returns over time, particularly in market environments where performance is less than stellar. This structure also raises the performance threshold a fund must deliver just to match the net returns of low-cost public market investments.
In contrast, a globally diversified portfolio of public investments typically has much lower fees, often below half a percent per year. This allows you to retain more of your assets while keeping them invested.
In addition to high fees, alternatives are extremely illiquid. Once committed, your funds are typically locked up for 7-10 years or longer, with no ability to exit early. This is unlike public markets, where you can sell at any time. This lack of liquidity reduces financial flexibility and creates opportunity costs, especially if your capital could have been deployed elsewhere during that period. In addition, if your financial circumstances change or markets shift dramatically, you’re stuck waiting.
Outlier Success Requires Top Access
Exceptional success in alternative investments often depends on access to top-tier managers—those with a track record of delivering outsized returns. However, gaining access to these funds is difficult for multiple reasons. First, many are limited to qualified purchasers, a regulatory designation for those who have at least $5 million of investable assets. Second, top funds often require minimum investments of $10 million or more.
In addition to these hurdles, the most successful funds are frequently oversubscribed, highly selective, and may even close to new investors entirely. When they do accept new investors, they often prioritize large institutions like university endowments, foundations, and pension funds. Most other investors end up in lower-tier funds, paying higher fees for mediocre performance.
Top-tier funds have traditionally returned 15-30% annually, while others struggle to exceed mid to low single digits returns. When adjusted for risk, many alternative strategies fail to justify their appeal.
Comparing Alternatives to Traditional Markets and Bitcoin
While much of the conversation around portfolio construction focuses on traditional public markets and private alternatives like venture capital and private equity, it’s worth considering a third, increasingly relevant asset class: Bitcoin. Though fundamentally different from both stocks and private funds, Bitcoin should be considered as investors explore uncorrelated assets and/or seek outsized returns. It offers a compelling point of comparison across several key dimensions—especially volatility, returns, and liquidity. Let’s take a closer look at the characteristics of alternative investments, globally diversified public portfolios, and Bitcoin.
Volatility
Alternatives: While marketed as having uncorrelated behavior to traditional market assets in varying economic conditions, the true volatility of alternatives can be hard to gauge due to illiquidity and opaque reporting.
Globally Diversified Portfolio: The volatility will be highly dependent on the portfolio allocation, but in general, low to moderate volatility is most common.
Bitcoin: Highly volatile, with price swings driven by macroeconomic factors and market sentiment. However, Bitcoin is slowly starting to gain traction as a safe-haven asset.
Returns
Alternatives: Potential for high returns exists, but fees and lack of access to top managers often diminish net results.
Globally Diversified Portfolio: Returns depend on portfolio composition, but historically, a well-allocated global portfolio has delivered consistent long-term growth. While it may not deliver the highest returns in any given year, broad exposure to global equities and bonds helps balance risk and reward—making it a resilient, lower-volatility strategy for building wealth over time.
Bitcoin: The best-performing asset since inception. While future returns may moderate compared to Bitcoin’s early years, several tailwinds—such as increasing institutional adoption, growing user ownership, and a fixed supply schedule—suggest it still has potential for strong long-term performance.
Liquidity
Alternatives: Typically illiquid, with lock-up periods typically lasting 7-12 years.
Globally Diversified Portfolio: Highly liquid, as publicly traded stocks can be bought or sold during stock market hours.
Bitcoin: One of the most liquid assets available, especially as the network operates 24/7/365.
| Investment Strategy | Volatility | Liquidity | Average Annual Historical Returns | Valuation Frequency | Expenses |
|---|---|---|---|---|---|
| Globally Diversified Portfolio | Low–Moderate | High (most business days) | 7–12% | Daily (on business days) | Low (< 0.5% per year) |
| Bitcoin | Very High | Very High (24/7 trading) | 50–85% | Continuous (24/7) | Low (< 0.5% per year) or self-custodied for a nominal fee |
| Venture Capital | Very High | Very Limited (typically 10–12 year lockup) | 15–30% (top-tier funds) | Quarterly or Annually | Very High (2% per year + 20% of profits) |
| Private Equity | High | Very Limited (typically 7–10 year lockup) | 12–20% | Quarterly | Very High (2% per year + 20% of profits) |
When Do Alternatives Make Sense?
Alternative investments can be beneficial when they align with an investor’s goals and risk tolerance. In certain scenarios, they have added meaningful value to portfolios, particularly when managed by top-tier professionals or accessed through exclusive deals.
However, for most investors, the combination of high fees, limited access to the best managers, and lack of liquidity often makes traditional investments a more prudent choice. Public markets and Bitcoin can offer compelling alternatives with clearer risk-return profiles and liquidity.
Statistically, it's unlikely that most alternative investments will translate and perform at the top-tier level. Ultimately, you need to be compensated for the risk, volatility, and illiquidity you're taking on with alternatives.
The Bottom Line
Alternative investments can be an intriguing addition to a portfolio, but they’re not the silver bullet they’re often made out to be. If you’re considering them, it’s essential to weigh fees, performance, transparency, and liquidity. And unless you have access to the top managers or exclusive opportunities, be prepared for results that may not live up to expectations.
Among the growing set of alternative assets, Bitcoin has emerged as a distinct option gaining traction with investors. While still volatile, its strong long-term performance and asymmetric return profile make it a compelling addition to investment strategies. Even a small allocation can enhance portfolio returns, making it a useful complement to more traditional stock and bond portfolios.
Partnering with a professional is key to developing, executing, and maintaining a cohesive investment strategy aligned with your goals. It is recommended to work with advisors who bring deep expertise in global markets and a strong understanding of alternative investments—whether that’s venture capital, private equity, or Bitcoin. Prudent guidance can make all the difference.