High-Cost

Beta

Masquerading

as

Alpha:

The

Institutional

Illusion

of

Alternative

Investing

and

the

Need

to

Return

to

Basics

Institutional investors have dramatically expanded their exposure to alternative investments, now allocating as much as 30–50% of total portfolios to private equity, hedge funds, real estate, infrastructure, and private credit. While these asset classes once offered genuine alpha through access to inefficiencies and niche strategies, they are now increasingly crowded, financialized, and expensive. This paper argues that much of what is currently labelled “alternative” is no longer truly alternative. Many institutional scale alternatives now deliver high-cost beta—returns driven by financial engineering and leverage—while charging alpha-level fees. For example, hedge funds returned just ~5% annually over the past 5 years (HFRI FWC), compared to a 60/40 stock-bond portfolio at approximately 7% (Vanguard estimate). Net-of-fee private equity performance, meanwhile, has hovered around ~10%. With dispersion declining and fee drag rising, institutional portfolios face a reckoning.

The solution lies in redirecting capital toward truly uncorrelated, under-capitalized strategies and smaller, niche managers. These strategies often demand more complex underwriting but offer the genuine diversification and return potential that alternatives once promised. View Full Report