Expected Returns for Alternative Assets: Investors Need to Know

Alternatives — such as private equity, venture capital, private credit, hedge funds, real estate, and crypto — have drawn significant interest. In Episode 219 of Rational Reminder, hosts Ben Felix and Cameron Passmore explore the historical returns, risks, and structural complexities of these assets — and why they matter to legal claims against advisors. See: https://rationalreminder.ca/podcast/219

1. Why Alternatives Defy Simple Valuation

Public equities have transparent, market-based pricing; alternative assets do not. This opacity leads to smoothing in reported returns, which masks actual volatility. When firms switch to fair-value accounting, inconsistency in performance evaluations emerges—diminishing their appeal.

This lack of transparency makes it difficult for advisors to properly assess product risk — a key step under Know Your Product (KYP) rules.

2. Performance Dispersion: Skill Matters — A Lot

• Private equity: Top quartile funds can outperform public equities by 12.5% annually, while bottom quartile funds underperform by over 7%.
• Venture capital & angel investing: Returns are heavily skewed—few big winners and many losers. Over 50% of angel deals lose money.

This underscores a harsh reality: manager selection dominates outcomes—something many investors and advisors may overlook.

3. Lower Long-Term Returns Than Advertised

Despite expectations, long-term returns on private equity often resemble public small-cap equity once fees and valuation premiums are considered. Some academic studies suggest that buying smaller public companies generates return premiums similar to private equity.

Given capital inflows, rising valuations, and high fees, net-of-fees expected returns on private equity today hover just above public equities — typically only 0.5%–1% higher.

4. Fee Structures Compound the Risk

Alternative asset classes frequently carry multiple layers of fees — management, performance, custodian, and transactional. These fees:

• Reduce investor returns,
• Serve as potential conflicts of interest, and
• Must be clearly disclosed under Client-Focused Reforms (CFRs).

5. Valuation Opacity & Illiquidity

Alternative assets are often:

• Held privately,
• Valued infrequently, and
• Difficult to sell promptly or fairly.

Advisors must ensure clients understand these limitations before recommending – otherwise, they risk unsuitability or misrepresentation claims.

6. Legal Risks for Advisors

Recommend alternative investments without:

• Proper valuation disclosure,
• Transparent fee breakdown, or
• Assessment of manager skill and suitability?

You could have a breach of suitability claim, a KYP/KYC negligence case, or a conflict-of-interest violation under NI 31-103 and CFRs.

🔍 For Investors: What You Should Ask

1. How are valuations calculated? Confirm frequency, methods, and benchmarks.
2. Ask for any buyout fund's PME (Public Market Equivalent). Compare to public equivalents.
3. Request historical manager performance split (top, median, bottom quartile).
4. Seek full fee disclosure — all layers, including carried interest.
5. Understand illiquidity terms — redemption limits, lockup periods, and governance.
6. Verify alignment with your risk tolerance and liquidity needs—don’t rely on vague labels like “high yield.”

📞 How Geller Law Can Help

• Investigate advisor records — KYP, KYC, conflicts, and performance assumptions.
• Document reliance and harm — where investors accepted misleading return or risk representations.
• Litigate or negotiate — on suitability, misrepresentation, and negligence grounds.

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