You Can’t Get Access to the Best Alternative Assets

One of the services most frequently touted by private wealth managers is their ability to provide access to outstanding alternative assets like hedge funds. Unfortunately very few private wealth managers have access to the hedge funds that are worth the fees. Of course, that won’t stop them from promising you the best and delivering poor alternatives. That’s why David Swensen, Yale’s former Chief Investment Officer and the man most identified with employing alternative assets, essentially said in the introduction to his groundbreaking book Pioneering Portfolio Management, that if you can access premier alternative assets like hedge funds, you should, but it’s highly unlikely that you can, so you shouldn’t.

Understanding Risk and Reward

As we have explained many times in this blog, returns tend to be correlated with risk. Higher returns usually can only be achieved by taking on more risk. The chart below illustrates this point well. It displays the dispersion from the average annual  return for each asset class over the 15 years ended September 30, 2025.

Source: Cambridge Associates and eVestments.
Note: Returns for bond and equity managers are average annual compound returns (AACRs) for the fifteen years ended 9/30/25. Returns for private investment managers are net internal rates of return calculated since inception to 9/30/25 for vintage years 2010–2024.

The asset classes have been laid out such that the least risky asset classes are on the far left and the most risky on the far right. You will notice the variance of returns within each asset class increases as the risk increases. Another way to think about this is manager selection makes very little difference at the low end of the risk scale (the left side of the graph), but makes a big difference at the high end.

Persistence among the top performers also increases as you move from left to right. A common characteristic of the best performing managers is their desire to limit the amount of money they manage. The less successful managers are willing to take as much capital as they are offered. There is a very good economic justification for this behavior. The best managers of alternative assets are paid a management fee equal to 1% to 2% of the assets they manage and 20% of the profits. If you are confident in your ability to generate outstanding returns (which are typically predicated on limiting the amount of money you manage) then you can earn far more on your percentage of profits than management fee. If you’re not confident in your ability to generate great returns then you want to maximize your capital under management to maximize your management fees. Not surprisingly, the best managers on the right side are heavily oversubscribed which allows them to be very choosy as to which investors they wish to take. Therefore access is of critical importance.

Not All Investors Are Equally Attractive

As a founding partner of one of the leading venture capital firms, Benchmark Capital, I can tell you we were very selective regarding whom we would accept as investors. University endowments are typically viewed as the ideal investor because of their sophistication and very long-term investment horizon. The worst possible clients were individual investors, typically aggregated by private wealth managers. Individuals are viewed poorly because they typically have the shortest time horizon and are inappropriately spooked by short-term negative results (i.e. they attempt to time the market).

I hope you see where I’m going. The only alternative asset managers who would accept money from private wealth management firms are typically the poor performers or the desperate. I think Groucho Marx captured the appropriate perspective for an individual investor reviewing alternative assets when he famously said “I would never join a club that would have me as a member.”

Wealthfront Has Annualized Returns that Compare Very Favorably to Hedge Funds

To illustrate how poor the typical results for hedge funds are, let’s compare the average annualized hedge fund return over the past 10 years with the average annualized Wealthfront portfolio return. To evaluate the average hedge fund, we’ll use the HFRI Fund-Weighted Composite Index. This index measures the equal-weighted, net-of-fee performance of hedge funds around the world with at least $50 million under management or $10 million under management and a track record of at least one year.

For Wealthfront we’ll use the annualized returns for our most common risk-level for our Classic Automated Investing Account (8 on a scale of 0 to 10). As you can see from the table below, the Wealthfront portfolio’s annualized return was 2.43% to 8.85% better than the average hedge fund’s annualized return depending on the time period. That’s an enormous difference in investing returns.

Source: Wealthfront & HFR (returns data ending on 4/30/26)

Taxes Make the Wealthfront Advantage Even Greater

The advantages of the Wealthfront portfolio become even greater when you take taxes into consideration. The Wealthfront portfolio becomes much more valuable when you add in the potential incremental benefits of tax-loss harvesting and direct indexing.

Hedge funds raise the majority of their money from tax-exempt entities like university endowments, charitable foundations and pension funds. As a result they pay far more attention to their pre-tax return than their after-tax return. Their high portfolio turnover rates lead to the recognition of significant short-term capital gains which are taxed at the highest state and federal tax rates. In contrast, Wealthfront uses index funds, which experience very low turnover, and employs dividends to rebalance its portfolios in order to minimize the number of security sales. As a result Wealthfront portfolios generate very limited short-term gains, which makes our after-tax returns even more compelling on a relative basis than what we present above.

The Perils of Fund-of Funds

To be fair, our analysis compares an average Wealthfront portfolio to an average hedge fund. As the first chart showed, the top-performing hedge funds can offer stunning returns as compared to the industry mean. However, the top-performing hedge funds are incredibly difficult to access. Many private wealth management firms address this marketing challenge by creating fund-of-funds that might get access to at most one or two top-performing hedge funds. Unfortunately the remaining 90–95% of the fund is usually filled with funds you really don’t want to own, but the only funds that are discussed in the sales process are the outstanding one or two firms. In this way many unknowing investors are hoodwinked into investing in what usually turns out to be a lousy-performing hedge fund fund-of-funds.

You Are Not An Endowment. Avoid the Fees on Mediocre Alternatives.

An investor worth several million dollars likely thinks of herself as an exceptional success, and financially, she is. However, if you don’t have at least $50 million to invest and have really good connections, then it’s highly unlikely you will have access to the premier hedge funds.

The next time you get a pitch from a financial advisor about her access to the best hedge funds, be very circumspect. It’s highly unlikely your advisor has access to anyone in the top quartile, but that won’t stop her firm from charging significant fees nonetheless. It’s common for brokerage firms to charge a 1% management fee for their hedge fund fund-of-funds (and many charge a percentage of profits as well) on top of the hefty fees the hedge funds charge—despite sub-par performance.

If maximizing your after-tax returns is what you’re after (and if it’s not, it should be) then I would avoid hedge funds (and other alternative assets) offered by private wealth managers at all costs.