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ABOUT 10 YEARS AGO, Steve Edmundson, manager of the Nevada state pension, became a folk hero in the investment world when The Wall Street Journal profiled him in an article titled, “What Does Nevada’s $35 Billion Fund Manager Do All Day? Nothing.”
It was an exaggeration to say he did “nothing,” but Edmundson definitely did things differently. Since the 1980s, the trend among pension and endowment managers had been to follow in the footsteps of Yale University’s David Swensen. Swensen had achieved outstanding returns for Yale’s endowment by shifting into private investment funds, including venture capital, private equity and hedge funds. Edmundson bucked that trend, opting for a simple portfolio of index funds. He ended up achieving better results than his peers.
Despite the attention Edmundson received for his simple approach, private funds continue to be popular among institutional investors. According to data from the Boston College Center for Retirement Research, 65% of endowment assets are invested in private funds, as are 35% of public pension funds.
Today, there’s a growing push for individual investors to get into private funds. Firms such as Morgan Stanley, Goldman Sachs, BlackRock and even Vanguard Group are rolling out new funds geared to individuals. In his annual letter this year, the CEO of BlackRock made this argument: “While private assets may carry greater risk, they also provide great benefits.”
I don’t find this argument convincing. Even for very high net worth investors, the downsides of private funds can outweigh the benefits. Five factors, in particular, stand out.
1. Performance. A key challenge with private funds is that they’re like private clubs. They have limited space, so they can’t accept everybody. As a result, universities and pension funds, which can write the largest checks, are typically first in line for the best funds. This relegates individuals—even very wealthy individuals—to the second tier and below.
In an interview a while back, one high-profile venture capitalist explained this dynamic: “[W]hy do I want an investor in my long-term capital fund who’s going to feel the urge to want to sell when the market goes down…. If I’m in the fortunate position to be able to choose any investor I want, that’s the last investor I want. So the best investor, the one that is the most long-term oriented, is either a university endowment or a charitable foundation.…”
This is a problem because research has found that a wide gap separates the best private funds from the worst, and that this gap is much wider than the corresponding gap among publicly traded funds. Result? The private funds available to individual investors may not deliver the returns these investors expect.
Meanwhile, the future performance of private funds—even the best funds—is starting to look more uncertain. According to a recent analysis by Moody’s Investors Service, private equity firms were facing a challenging environment even before this year’s market downturn. The chairman of Bain & Company, one of the most prominent firms in the field, recently commented, “We aren’t even in a recession now, and we’re already at a point where things are incredibly challenging.”
This may help explain the pattern in recent private fund performance. Over the past 25 years, private equity has, on average, outperformed standard market indexes like the S&P 500. But this edge has lately disappeared, and private funds have lagged in recent years.
2. Illiquidity. Back in 2008, when financial markets seized up, some universities found themselves boxed in by their private fund holdings. Most notably, Harvard made news when it was forced to sell a significant portion of its private equity holdings at a loss during the worst of the crisis.
Why did Harvard sell its holdings at such an inopportune time? This gets at another key difference between public and private funds. Withdrawals from private funds are tightly controlled. Some funds allow quarterly redemptions, while others allow redemptions only annually. During periods of stress, however, these funds have the right to suspend withdrawals altogether. This is known as gating.
This is the position Harvard found itself in. In that situation—when a private fund won’t offer a redemption—the only alternative is to try to sell the holding to another investor on the “secondary” market. Such sales aren’t guaranteed, though, and that can compound financial distress.
Ironically, Harvard seems to have made the same mistake twice. Facing a reduction in funding from the federal government this year, the university is reportedly trying to arrange another secondary sale, looking to offload up to $1 billion of its private fund portfolio. Yale, too, is working to unload some of its holdings.
Some of the newer funds being rolled out for individuals allow for more frequent withdrawals, which is helpful. Still, illiquidity is just one of the challenges posed by private funds.
3. Fees. If there’s anyone who knows the landscape of private funds and fund managers, it’s longtime Wall Street Journal reporter Gregory Zuckerman. He’s covered the world of hedge funds and private equity since the 1990s, so his reaction was notable when, back in March, it was announced that the Boston Celtics would be sold for more than $6 billion to a private equity executive named Bill Chisholm.
“Private equity is rolling in so much dough that a guy I’ve never heard of at a firm I’ve never heard of can afford to buy one of the most prestigious teams in sports,” Zuckerman wrote.
Private fund fees, in other words, are extraordinarily high. According to one recent study, fees can total as much as 4% per year. By contrast, index funds today charge as little as 0.03% in annual expenses, and some are even free.
4. Risk. Private fund enthusiasts argue that these funds carry lower risk than their publicly traded counterparts. But the basis for this argument is shaky. Since private funds generally issue valuation updates infrequently—usually just quarterly—they exhibit less price volatility than public funds, where prices are updated every day. But this just makes private funds appear more stable. During periods of market stress—when it matters most—private fund valuations can become quite disconnected from reality. Critics have called out this practice as “volatility laundering,” but it continues.
Pricing, though, is just a symptom of a larger issue: that private funds are essentially black boxes. They aren’t subject to the same regulatory oversight as standard funds and offer much less transparency. While fraud can and does occur at public companies, it’s much more prevalent among private funds.
5. Taxes. A final challenge with private funds is that they tend to deliver unpredictable tax results, and often these results aren’t even known until many months after the year has ended. This makes tax planning for private-fund investors an exercise in frustration.
Can you make money in a private investment fund? Probably. But I see it as an uphill—and unnecessary—battle.
Adam M. Grossman is the founder of Mayport, a fixed-fee wealth management firm. Sign up for Adam’s Daily Ideas email, follow him on X @AdamMGrossman and check out his earlier articles.
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Nice article, Adam. Thank you! I will stick with public funds only.
Here’s a Morningstar article that discusses pros and cons. There’s also one today announcing they’re going to start rating private equity/credit funds.
https://www.morningstar.com/alternative-investments/what-financial-advisors-think-about-private-market-investing
This is a follow-up comment to my earlier comment on Adam’s article. I read an interesting article in Forbes.com titled “Why Private Equity Is Betting On Tokenization” by Azeem Khan, dated May 04, 2025. By tokenizing private investments Wall Street firms find a slick way to distribute illiquid, risky and potentially non-profitable assets to the public under the guise of block-chain technology. Here’s a ChatGPT summary of Khan’s article:
Over the past decade, private equity (PE) firms thrived in an environment of low interest rates and easy capital, rapidly expanding their holdings across real estate, healthcare, tech, and infrastructure. Assets under management surged past $13 trillion by 2022. But by 2025, the macroeconomic climate has reversed: inflation remains persistent, interest rates are high, and liquidity has dried up. Traditional exit routes—IPOs, acquisitions, and secondary sales—have stalled, leaving PE firms sitting on vast portfolios they can’t easily monetize.
In this new landscape, tokenization is emerging not just as a novel innovation but as a strategic necessity. By converting illiquid assets into blockchain-based digital tokens, firms can fractionalize ownership, enable round-the-clock trading, and potentially tap a broader global investor base. Major financial institutions like BlackRock and Franklin Templeton are already building tokenized fund structures, signaling a broader shift toward blockchain infrastructure.
Crucially, this shift isn’t being driven by a sudden love for blockchain—it’s being driven by pressure and need. Firms are turning to tokenization because they need new “liquidity rails” for assets that no longer have viable exit paths. The technology is becoming a distribution tool for offloading hard-to-sell holdings, especially to retail investors, who are being invited into markets that were previously the domain of large institutions.
That’s why understanding the motivations behind tokenization is vital. While it may democratize access and improve capital efficiency, it also risks becoming a mechanism for transferring illiquidity and valuation risk to less sophisticated investors under the guise of innovation. Without adequate regulation and investor protections, tokenization could mask deep structural problems in private markets.
The article discussed two ways far from each other.
Between index funds and private funds, we have managed funds. You can find well-managed funds from VG, Fidelity, and others
The biggest problem of the indexes is the fact they may not work for many years. The SP500 lost close to 9-10% total during 01/2000 to 01/2010.
Value, international, and small-cap made money.
The above means you can mix both. Suppose you go with 5 funds, select 2 indexes + 3 managed funds. Any time you don’t like a managed mutual fund, replace it with another. No need to worry about liquidity and very high expense ratio.
I suspect that institutional investors don’t index because following-the-herd ( similar institutions) provides cover for the institution’s endowment managers. If the investments don’t do well, “well, our results are similar to what other institutions are getting” or “we need to change investment managers.” If they index, and the market goes south, they can’t point fingers at anyone. There is also the bias of doing something (hiring an investment firm) vs. doing nothing (passive indexing).
The characteristics of Private investments (also being marketed as Alts – short for Alternative Investments) are:
Interesting info, however, I will never need to worry about making the decision between private equity or index funds, unless I win the Powerball.
Cheers!
Excellent article! Main Street is always left taking Wall Street’s garbage to the dump.
How can I invest in cold fusion except via private funds?
Excellent article, Adam. This topic—does PE outperform publicly available investments—has interested me as I’ve had the opportunity to invest in private markets, but have remained skeptical. Having read various articles on the subject, I’ve reached the same conclusion as you have. I also perceive that PE is a way for wealth management firms to lock in clients and collect fees, since it’s difficult to leave a firm that has an investment association with a PE firm in which you are invested. The long lock-up periods inherent in PE investments reduce portability (clients staying with the firm) benefiting the advisor and in some cases more than the client. As expense fees have been reduced with the advent of index funds and ETFs, Wall Street has had to innovate—often cleverly—to protect and grow its fee base. PE investments have emerged as a profitable approach offering firms a means to reclaim margin lost to low-cost passive products. While some private equity funds have outperformed public benchmarks, persistent outperformance is rare, especially net of fees. The lack of transparency, high costs, and illiquidity make it difficult for the average investor to fully evaluate risk-adjusted returns. In many cases, the theoretical premium for illiquidity simply doesn’t materialize once all costs are accounted for.
I recalled Charles Ellis broaching this subject in his book “Figuring it Out”. So, I asked ChatGPT to summarize Ellis’ position (a faster and more accurate approach than myself trying to):
1. Illusion of Outperformance: Ellis argues that private equity (PE) and other private funds often appear to outperform due to the way returns are reported. Private funds use Internal Rate of Return (IRR), which can be misleading because it assumes reinvestment at the same high rate and ignores the timing of capital deployment. Public funds report time-weighted returns, which are more reflective of actual investor experience.
2. Risk and Liquidity Premiums: While private investments do offer some premium, Ellis points out that much of their “excess return” can be attributed to illiquidity, concentration, and leverage—not superior skill. Essentially, you’re getting paid more because you’re taking on more risk and giving up liquidity, not because the investments are inherently better.
3. Selection Bias: Ellis highlights survivorship and selection bias in private fund reporting. Underperforming funds are less likely to be included in performance databases, and firms selectively market only their best-performing funds.
4. Declining Alpha Over Time: He emphasizes that as private equity has become more popular and capital has flooded into the space, the opportunity for consistent outperformance (alpha) has diminished. Competition has driven up prices and reduced the inefficiencies that early PE funds once exploited.
5. Access and Fees: Ellis also critiques the high fees of private funds—typically “2 and 20” (2% management fee, 20% of profits)—which erode returns. He argues that these fees, combined with opaque reporting and limited liquidity, make private funds less attractive for most investors compared to low-cost index funds.
Ellis’s overall conclusion is that the average investor is unlikely to benefit from private funds, especially when compared to the simplicity, liquidity, and transparency of public market index investing.
Thanks Adam. I think one of the most challenging aspects of moving beyond traditional stocks and bonds is understanding what the investment consists of. In 2010 my vision of Lockheed Martin was sold to a PE firm, Veritas Capital. They owned companies, mainly focused on the Aerospace and Defense market. Since 2010 they have expanded into other areas like healthcare, IT and more. They have grown to over $50B in assets under management. The CEO recently made Forbes list of billionaires.
The landscape of alternative investments is pretty enormous, and hard to navigate. Some of these companies, like Blackrock (BLK) and Apollo (APG), now have publicly traded options. Some have fairly high dividend yields. It seems like a growing sector that future investors may need to understand.
A few years back, I had a conversation with a young investor about his dabbling in private equity. I came to realize he and a few buddies were enamored with the idea of something different than the same old boring stuff. He assured me that the bulk of his investing was index funds, but he liked the idea of a chance at a big win with part of his money.
I get it. Investing is intrinsically interesting. For him, private equity investing gave more mental reward than financial, and that’s fine. I’d rather have boring, however, with stimulation coming from elsewhere in my life.
I need some fun with equity investing. Index fund are the bulk of my equity investments, but I also have a small “gambling” account, which I think I got the idea for in HumbleDollar, where I bet individual stocks. Rules are that bets are limited to approx $1k and nothing may be sold until it’s a long term gain or loss.
Also, I put $3k in a bitcoin ETF to hold forever (it will go to zero or I will be a gazillionaire) and put some money into gold purely because of the current momentum.
Why would I pay someone a fee to do this? I want to play the game myself.
Your last sentence, Edmund, reflects values that we share, although I trust my investment decisions to others who know I prefer low- risk choices. I hope and pray that the young investor in my life (teen grandchild who lives with me) doesn’t go too far in seeking the excitement and fast bucks of riskier investments. A year ago, when he still had a custodial account with me, he urged me to sign a special form authorizing him to do options trading. Fortunately, he didn’t push back too hard when I refused 😉. The other risk I chose to forego was allowing him to trade on behalf of his teen lunch mates at school. Can you imagine the phone calls I could have gotten from the parents? But I don’t blame him for trying.