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1. TravelBloggerBuzz says

   April 24, 2025 at 6:26 am

   From the WSJ Article back in 2014:

   Alternative investments aren’t just for deep-pocketed institutions and the very wealthy anymore.

   In recent years, investment firms have flooded the market with a wide variety of alternative offerings aimed at the less affluent, including private-equity funds with manageable initial investments and mutual funds and exchange-traded funds that employ hedge-fund-like strategies.

   Individual investors seeking to juice their portfolios have responded with enthusiasm, pouring tens of billions of dollars into the new offerings. Assets under management in alternative mutual funds, for example, swelled to $317.9 billion in March, up from $180.4 billion at the end of 2012, according to fund tracker Lipper.

   Supporters believe that the mainstreaming of alternative investments is a financial innovation that is here to stay. When used correctly, they say, alternatives provide individuals with some of the same benefits that have made them attractive to institutions.

   Critics say just because individuals can now invest in alternatives doesn’t mean they should. Many of these products come with high fees, too much risk and little transparency, they say, adding that over time it is hard to beat the inherent advantages of a low-cost indexed portfolio rebalanced regularly.

   Klaas Baks, executive director of the center for alternative investments and an associate professor of finance at Emory University’s Goizueta Business School, says alternatives can provide individuals with some of the same benefits that have made them attractive to institutions. George Papadopoulos, a fee-only wealth manager in Novi, Mich., says they are too risky and expensive for most individuals.

   No: They Aren’t Worth the Expense and Risks

   By George Papadopoulos

   To hear the salespeople tell it, alternative investments provide great diversification benefits and high rewards, along with protection against steep market drops.

   But the next time you get a pitch for a hedge fund or nontraded real-estate investment trust, consider this: Exotic assets may make a portfolio seem a lot sexier, but they may not get it to perform better over the long term. Factor in risks and expenses, and alternative investments just aren’t worth the trouble.

   The alternative-investment category is broad and can include tangible assets (precious metals, antiques, art, wine) and financial assets (private equity, venture capital, hedge funds, commodities). In recent years the Wall Street marketing machine, hungry for sales commissions, has broadened its target market to include regular investors by repackaging alternatives in the form of mutual funds and exchange-traded funds.

   Alternatives may come in many different forms, but the disadvantages associated with them are similar. In general, here is why alternative investments aren’t appropriate for most individual investors:

   Risks: Investing in and regularly rebalancing a low-cost investment portfolio of broad-based index and exchange-traded funds is hardly water-cooler material. We’d much rather brag about the “To the Moon Hedge Fund” that returned 59% in three trading sessions last week. Let’s be blunt here. The nature of the alternative structure tends to encourage managers to take risky leveraged bets to maximize returns and their own management fees, and it keeps attorneys who specialize in financial-adviser fraud very busy. Beware.

   Fees: High management fees are only the beginning as you are led to believe you are buying into an exclusive club of investment-manager geniuses (see Long-Term Capital Management, the hedge fund with its two Nobel Prize-winning economists that failed spectacularly in the late ’90s). When you add trading fees, juicy sales commissions, marketing costs, and leverage, you are starting with a big disadvantage that isn’t easily overcome even through high returns. A client attended a free dinner where a salesperson put on a slick presentation about a nontraded REIT. When he asked me to research it, I discovered that it had 10.5% upfront sales commission and 7.5% ongoing annual fees. “Run fast from this one,” I advised. Later we learned that the sponsor company has been involved in litigation recently for “breach of fiduciary duties.”

   Lack of transparency: I owe it as a fiduciary to my clients to fully understand any investments I recommend, including all related fees and risks. Heads up to marketers pitching alternative products: If your pitch includes any reference to “proprietary” techniques, please don’t bother me. Nothing personal.

   Lack of liquidity: Imagine we are back in the dark days of late 2008-early 2009. You had invested in a “hot” hedge fund and now are being told you cannot access your money. You panic and lose sleep. You sell at a loss at your first opportunity. I am not saying investors sticking with boring strategies weren’t scared back then, but it’s easier to stay the course when you understand what you are invested in and are comfortable with it. Alternative mutual funds and ETFs may address the liquidity concern—but they also come with an average expense ratio of about 1.77% of assets, according to Morningstar Inc., which is several times higher than what my clients average.

   Higher taxes: When you invest in an alternative investment, you give up the flexibility to control your own tax management. You are at the mercy of the manager who often trades too frequently. You can be assured of a much higher tax-preparation bill, too.

   Some alternative investments outperform, but seldom consistently. As time goes by, it gets tougher to beat the inherent advantages of a low-cost indexed portfolio rebalanced regularly. While alternative investments may provide some diversification, especially with the U.S. markets at all-time highs, the negatives vastly outnumber the positives.

   By the way, my client ran from that nontraded REIT despite repeated follow-up calls from the salesperson. He sent me an email afterward to thank me: “Why I hired you…to protect me from myself.”

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2. DML says

   April 24, 2025 at 8:51 am

   I had not thought of Long Term Capital Management for years. The Fed decision to bail it out was such a disaster. Private gains, social loses. Ouch

   Enjoy the cave!

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3. bob says

   April 24, 2025 at 9:46 am

   Howdy from the good ole USA. Still got pretty strong jet lag but should be back in shape in by next week. A few comments:

   1. I think it’s criminal what the private equity firms are trying to do to allow 401k’s to invest in private assets. It’s nothing more than a psuedo-bailout of companies that made poor investments when interest rates were cheap and now are left holding the bag when it comes time to monetize the asset. The capital markets are closed to their typical exit of IPOs, private credit is coming off from the bubble it has been the past year, and other private equity companies don’t want to play hot potato any more shuffling assets between themselves.

   And compound that with officials in Washington, who no doubt are on the take, that are pushing for these changes not knowing, or caring, the damage that will inevitably take place.

   2. Re: “Trump’s crackdown on foreign students and scientists will do irreparable harm to the country.” This has already been taking place for awhile going back to the days of W. Bush limiting research on stem cells. There’s a reason why professional athletes travel to Germany to help accelerate rehab for injuries. Because we’re not allowed to do that here in the US. No doubt it will continue to get worse.

   3. Re: Thai. It’s part of the charm, and also opens it up to exploitation. I have quite a few friends who are on muay thai visas or thai language visas that don’t attend class. The schools take care of all the paperwork and required reporting. Though the immigration department does make surprise visits to schools to check on students. Nothing a few thousand bahts can’t take care of however. At least their corruption is out in the open compares to American’s 401ks be usurped by congress and their ‘special interest’

   I also wouldn’t be surprised to see airlines try to make Thai-US work, especially to capitalize on the White Lotus craze. At a minimum Thai should introduce a LAX route given it is the largest Thai diaspora in the world. There might be enough premium demand between it and vacationers to make it work. I doubt any other city would work.

   Also DML: LTCM wasn’t bailed out by the Fed, their Bank creditors bailed them out. I would encourage you to read the book “When Genius Failed” to get a better understanding of the how and why it all went down.

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