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Aswath Damodaran: The Uncertain Payoff from Alternative Investments

Professor Aswath Damodaran’s latest analysis challenges the conventional wisdom surrounding alternative investments, revealing significant gaps between marketing promises and actual performance. Aswath examines how institutional and individual investors have increasingly embraced alternatives like hedge funds, private equity, and venture capital, often with disappointing results despite decades of compelling sales pitches.

Alternative investments have gained mainstream acceptance over the past two decades, moving beyond their traditional institutional confines to target individual investors. The core argument for these investments rests on two pillars: their supposedly low correlation with traditional stocks and bonds, and their potential to generate excess returns through superior management and market inefficiencies. However, Damodaran’s analysis suggests these benefits may be largely illusory when subjected to rigorous scrutiny.

Here are the key takeaways:

  • Correlation benefits are overstated: Historical correlations between alternative investments and public markets are artificially low due to pricing lags in private assets and tend to converge during market crises when diversification is needed most.
  • Alpha generation has largely disappeared: Excess returns from hedge funds dropped to zero or below by 2009, while private equity returns have converged to resemble public market returns in recent years as competition has intensified.
  • High fees erode any remaining benefits: The traditional “two-and-twenty” fee structure (2% management fee plus 20% performance fee) creates a significant drag on returns that often eliminates net benefits for investors.
  • Institutional skepticism is growing: Even sophisticated investors like Yale’s endowment, once a pioneer in alternative investing, announced plans to sell billions in private equity holdings in 2025 after years of underperformance.
  • Individual investors should exercise extreme caution: As institutional demand wanes, alternative investment managers are increasingly targeting individual investors who may be less equipped to evaluate the risks and costs involved.

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Disclaimer of liability

The above has been prepared by Børsgade ApS for information purposes and cannot be regarded as a solicitation or recommendation to buy or sell any security. Nor can the information etc. be regarded as recommendations or advice of a legal, accounting or tax nature. Børsgade cannot be held liable for losses caused by customers’/users’ actions – or lack thereof – based on the information in the above. We have made every effort to ensure that the information in the above is complete and accurate, but cannot guarantee this and accept no liability for errors or omissions.

Readers are advised that investing may involve a risk of loss that cannot be determined in advance, and that past performance and price development cannot be used as a reliable indicator of future performance and price development. For further information please contact info@borsgade.dk

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