A great article in the WSJ by Jason Zweig. I just had to share it:
Small-time investors may soon gain easier access to so-called private markets. That usually means higher fees, greater risk, more conflicts of interest and a harder time selling.
Hold on to your wallet. Wall Street is gearing up for a sales push that could enrich the middlemen and impoverish you.
I’m talking about private or alternative assets—investments outside the public stock and bond markets. In the right hands, these assets work wonders. In the wrong hands, they wreak havoc.
This coming year, with Wall Street and Washington likely opening the floodgates in unison, your financial adviser may inundate you with pitches to buy private assets. You should evaluate them with more skepticism than ever.
Hedge funds, venture capital, private-equity funds, non-traded real estate, private credit and other alternatives hold out the hope of better diversification and higher returns. All too often, those potential virtues come at the cost of higher fees, greater risk, more conflicts of interest and less disclosure. And you can generally sell only at certain times, not whenever you feel like it.
That’s why access to alternatives has long been restricted to big institutions and wealthy individuals, who can afford to lose most or all of an investment without going broke.
A few great investors, led by the late David Swensen of Yale University, have used alternatives to drive impressive outperformance. Often, however, these investments have been a costly path to mediocrity for even the world’s biggest investors.
As the managers of alternative funds have struggled to resell a glut of overpriced assets, they’ve also been stymied trying to convince big clients to add more money.
No wonder there’s an intensifying push to strip away the traditional protections for smaller investors.
A bill pending in the U.S. Senate would allow anyone who can pass an exam about “the risks and opportunities of investing in securities” to purchase alternatives.
Project 2025—the policy blueprint that President-elect Donald Trump has said he partly disagrees with—calls for loosening the regulatory restraints on who can invest in private assets. (As of now, purchases are often restricted to investors with at least $200,000 of income and $1 million in net worth, not counting their home.)
And the managers of private assets that may not trade for years at a time are stuffing them into exchange-traded funds, which trade all the time.
Financial advisers might tell you that you need to buy alternative assets because public stocks and bonds are overpriced and doomed to provide years of poor returns.
What they won’t tell you is that they need to sell you alternative assets, because otherwise their own firms will be doomed to years of poor returns.
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