More from article by Jason Zweig. Wall Street’s traditional sources of vigorish—the cut it takes as the middleman—have withered away. Many mutual funds used to charge 1% and up in annual expenses; now you can buy ETFs for 0.1% or less. Stock commissions, once 1% or more, have gone the way of the dodo.
On the other hand, expenses on alternative funds, often 2% annually, can range up to 6% or more. Commissions, often 2% to 5%, can sometimes even exceed 10%.
And no matter how private assets are repackaged, they have drawbacks that are hard to paper over.
Because the underlying holdings don’t trade publicly, valuing them is a mix of art and sorcery, with some managers booking one-day gains of 1,000% or more.
Private-equity and private-credit funds use lots of borrowed money to focus on smaller companies. “You’re adding a high-risk thing to your portfolio with a lot of the same exposures as public markets,” says Daniel Rasmussen, founder of Verdad Advisers and author of the forthcoming book “The Humble Investor.”
While some managers of alternative assets deliver superior returns, most don’t—and getting access to the few outperformers is all but impossible for most investors.
When it comes to the opacity and complexity of alternative assets, some financial advisers know what they’re doing. *****Others might not even know what they don’t know.*****
A recent survey of more than 500 advisers who use alternatives, conducted by private-asset specialist CAIS and the consulting firm Mercer, asked what their top challenges were.
Have you invested in alternative assets? How did it work out? Results:
The greatest number of respondents, 48%, named “high levels of administration and paperwork.”
Only 36% cited the lack of liquidity; a mere 26% said fees and expenses were too high; only 10% doubted they could get access to superior managers; and a piddling 4% said alternatives are “too risky.”
These advisers didn’t merely drink the Kool-Aid; they’re drunk.
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