Investment Planning: How Big is Your Nest Egg Really?
Learn how taxes, withdrawal strategies, and Roth conversions can affect the true value of your retirement nest egg and long-term retirement income planning.
Author: Chris Steward, CFP®, CFA®, RICP®, M.A. (CANTAB) | Director of Investments at Impact Advisors Group
Private Equity (PE) has historically justified its illiquidity and high fees by promising superior returns. In 2000, David Swenson, who managed Yale’s endowment, wrote a book called “Pioneering Portfolio Management” that recommended holding private equity and other types of illiquid holdings to enhance risk adjusted returns. That case for improving returns through Private Equity holdings has weakened materially. On 1,3,5, and 10‑year horizons, private equity has underperformed the S&P 500, marking a sharp reversal from prior decades.
For the last three calendar years Private Equity funds have returned roughly half the 22.5% return of the S&P 500 over the same period. Private Equity fund returns have been impacted by elevated interest rates which increased financing costs, and compressing leveraged returns, while a prolonged slowdown in IPOs and acquisitions has choked off exits. As a result, many portfolios remain priced on optimistic assumptions rather than realized cash flows, leading to concerns over so‑called “zombie funds” that cannot exit or raise new capital.
But perhaps most troubling, research suggests that businesses acquired by Private Equity firms are five to ten times more likely to go bankrupt than comparable non‑PE‑owned firms, highlighting the risks embedded in high leverage and aggressive cost‑cutting strategies. Private Equity is heavily reliant on deal‑making to monetize their investments. A Harvard Business Review survey of M&A research famously concluded that 70% to 90% of acquisitions are failures, calling the activity “a mug’s game”.
Hedge Funds were long marketed as diversified, market‑agnostic sources of return, to justify their average 3.4% in management and performance fees. But in the post‑Global Financial Crisis era, diversified Hedge Fund investing has underperformed. According to a CFA Institute analysis for the 15 years ending June 30, 2023, the 4.0% return of the HFR Fund‑Weighted Composite lagged the 4.5% for a simple blend of public market indexes with similar risk exposures.
The study’s conclusion is stark: for most institutions, Hedge Funds have reduced overall portfolio alpha and, in many cases, pushed it negative, while also depriving investors of desired equity exposure which has performed well. Although a handful of elite Hedge Funds may continue to perform, there is little strategic justification for broad Hedge Fund diversification.
Private equity and Hedge Funds, once considered a cornerstone of institutional investing, no longer reliably deliver on their core promises of outperformance and diversification. Rising rates, weaker exits, excessive fees, and disappointing long‑term results have exposed structural flaws in both models. For many investors, the “alternative” trade‑off of illiquidity, opacity, and cost increasingly looks unjustified—prompting a reassessment of whether these once‑favored strategies still deserve a central place in modern portfolios.
Evidence of disillusionment among institutional investors is growing. In 2024, the University of Connecticut’s $634 million endowment exited most Hedge Fund exposure, citing fees that “don’t justify the returns,” and replaced them with lower‑cost buffer ETFs designed to reduce volatility while improving liquidity. The shift underscores a broader institutional trend: reducing complexity and expenses in favor of transparent, liquid, and cost‑effective strategies.
So, what to do instead? We favor two approaches each with reasonable fees and complete liquidity and transparency. Our allocation to Alternatives is in liquid ETFs that seek to exploit uncorrelated market opportunities rather than rely on manager skill. We also, like UConn’s endowment, utilize options-based ETFs to mitigate some of the downside tail risk in both equity and bond markets. Reach out to us if you are interested in learning more.
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