Private equity, hedge funds, and other alternative investments have increasingly become fashionable among wealthy investors. Investment firms frequently promote these investments as opportunities to generate superior returns, reduce portfolio volatility, and access exclusive opportunities unavailable to ordinary investors.

The sales pitch is certainly appealing. After all, who wouldn’t want access to the same investment opportunities supposedly reserved for billionaires, university endowments, and institutional investors?

However, at Almega Wealth Management, we have deliberately chosen not to incorporate traditional private equity funds or hedge funds into our investment portfolios.

Our reasoning is not rooted in an aversion to innovation or an unwillingness to pursue attractive investment opportunities. Rather, it reflects decades of academic research, a disciplined investment philosophy, and a fundamental belief: Investors should not pay more, sacrifice liquidity, or accept unnecessary complexity without persuasive evidence they are likely to be adequately compensated.

When we examine private equity and hedge funds through this lens, we find relatively little reason to incorporate them into our clients’ investment portfolios.

Does Private Equity Actually Outperform the Stock Market?

Perhaps the most compelling argument for private equity is its purported ability to generate returns exceeding those available in publicly traded stocks.

But does the research substantiate this claim?

In a comprehensive 2024 study, Understanding Private Fund Performance, researchers at Dimensional Fund Advisors examined more than 6,000 private investment funds spanning 1980 through 2022. Their analysis encompassed private equity buyouts, venture capital, private credit, and private real estate.

The findings were illuminating.

Private equity buyout funds, on average, demonstrated outperformance when compared with the S&P 500 Index. However, when researchers compared those same funds against publicly traded small-cap value stocks, the apparent advantage disappeared.

In fact, the average private equity buyout fund slightly underperformed comparable small-cap value stocks over the period examined.

Why is this distinction important?

Imagine comparing the performance of a professional golfer playing from the championship tees against an amateur playing from the forward tees. The scores may look impressive until we account for the differences in the course each player is navigating.

Investment comparisons work much the same way.

Private equity funds frequently invest in smaller companies, use borrowed money, and assume risks different from those of the largest publicly traded corporations. Comparing their performance exclusively against the S&P 500 may therefore provide an incomplete picture.

The more relevant question is whether investors receive superior returns relative to comparable publicly traded investments exhibiting similar investment characteristics.

Dimensional’s research suggests the answer is far less compelling than private equity marketing materials might lead investors to believe.

The Hidden Cost of Private Equity: High Fees

One of the principal obstacles to superior investment performance is the extraordinary cost frequently associated with alternative investments.

Traditional private equity funds commonly employ a compensation arrangement referred to as “2 and 20.”

Under this structure, investors may pay:

An annual management fee of approximately 2%, often calculated using committed or invested capital.
An additional performance fee, commonly 20% of investment profits, subject to the fund’s contractual provisions.

Depending on the fund, investors may also incur administrative expenses, underlying transaction costs, and other charges.

Consider the implications.

Before investors participate in the profits, the fund manager receives substantial compensation for managing the assets. If the investments perform particularly well, the manager may receive an additional percentage of the profits.

The investor assumes the investment risk, while the manager enjoys a compensation arrangement capable of generating substantial revenue regardless of whether the investment ultimately outperforms an appropriate public-market alternative.

At Almega, we believe every dollar unnecessarily consumed by investment expenses represents a dollar unavailable to compound for our clients.

Over extended periods, relatively modest differences in investment expenses can materially affect accumulated wealth.

The Illusion of Lower Volatility

One particularly interesting selling point associated with private equity is the suggestion these investments experience considerably less volatility than publicly traded stocks.

Unfortunately, there is an important distinction between an investment experiencing less volatility and an investment simply reporting its value less frequently.

Publicly traded stocks are priced continuously throughout the trading day. Their prices respond immediately to changing economic conditions, interest rates, corporate earnings, and investor expectations.

Private equity investments operate differently.

Because the underlying investments are not traded on public exchanges, their values generally rely upon periodic appraisals, financial models, and estimates provided through the fund’s valuation process.

Consequently, private equity performance reports can exhibit artificially smooth returns relative to securities priced in active markets.

Consider two otherwise similar commercial properties. One is publicly traded through a real estate investment trust, while the other is privately owned and appraised quarterly.

The publicly traded investment may decline immediately when interest rates rise. Meanwhile, the privately held property may continue reflecting an appraisal completed months earlier.

Has the privately held property somehow escaped the economic consequences of rising interest rates?

Of course not.

Its valuation simply has not responded with the same immediacy.

Less frequent pricing should never be confused with less investment risk.

Dimensional’s research specifically identifies delayed valuations and artificially smoothed returns as important considerations when evaluating private investment performance.

Liquidity: The Freedom Investors Should Not Underestimate

Imagine purchasing an investment and subsequently discovering you cannot access your money when an unexpected opportunity—or financial necessity—arises.

For many private equity investors, this is not a hypothetical concern.

Traditional private equity partnerships may require investors to commit capital for seven to ten years, sometimes longer. Investors may also encounter restrictions on withdrawals, capital calls, and significant discounts if they attempt to sell their interests before the fund terminates.

Publicly traded investments generally offer considerably greater flexibility.

Although selling publicly traded securities during unfavorable market conditions may be undesirable, investors ordinarily retain the ability to make those decisions.

At Almega, we view liquidity as an important component of prudent financial planning.

Liquidity provides options. It allows investors to respond to changing circumstances, pursue opportunities, satisfy unexpected financial obligations, and rebalance their portfolios without navigating restrictive partnership agreements.

There should be a meaningful economic benefit before investors voluntarily surrender this flexibility.

The Challenge of Selecting the Right Private Equity Manager

Another important finding from Dimensional’s research concerns the extraordinary variation in performance between private investment funds.

Some private equity and venture capital managers have generated remarkable results. Others have delivered disappointing outcomes, including substantial losses.

This presents a difficult problem for investors.

In publicly traded markets, we can broadly diversify across hundreds or thousands of companies without relying upon the ability to identify a handful of exceptional investment managers.

Private equity makes this considerably more challenging.

Success can depend heavily upon selecting the right manager, investing in the right fund, and committing capital during an advantageous period.

Unfortunately, identifying tomorrow’s exceptional managers based on yesterday’s performance is far easier in a marketing presentation than in practice.

Dimensional’s research illustrates why this manager-selection problem matters.

For us, an investment philosophy dependent upon consistently identifying exceptional managers is considerably less attractive than one grounded in broad diversification, disciplined implementation, and academic evidence.

You May Already Own Private Equity Without Realizing It

Perhaps one of the more surprising revelations comes from another Dimensional study published in January 2026, Hiding in Plain Sight: Private Asset Exposure Through Public Equities.

The researchers examined the 20 largest publicly traded American companies and estimated their direct exposure to private investments at approximately $100 billion to $150 billion.

Companies such as Alphabet, Amazon, Microsoft, and NVIDIA have invested in privately held businesses through direct ownership interests, venture capital operations, or corporate subsidiaries.

This means an investor holding a diversified portfolio of publicly traded stocks may already have indirect exposure to privately held businesses.

For example, shareholders of a publicly traded technology company can indirectly participate in the economic results of its investments in private artificial intelligence businesses.

The exposure is not identical to owning a diversified private equity fund, nor does it provide access to every investment opportunity available in private markets.

Nevertheless, it challenges the notion investors must purchase illiquid, expensive private equity partnerships to obtain any exposure to privately held enterprises.

In some respects, private-market exposure has been hiding in plain sight.

Can private equity investments create taxable income inside an IRA or 401(k)?

Yes. Certain private equity investments, particularly those structured as partnerships, can generate Unrelated Business Taxable Income (UBTI) or Unrelated Debt-Financed Income (UDFI). These earnings may create federal income tax liabilities within otherwise tax-advantaged retirement accounts. An IRA with at least $1,000 in gross unrelated business income generally must file Form 990-T. Because the rules depend upon the investment structure and type of retirement account, investors should evaluate potential UBTI exposure before purchasing private equity or other alternative investments.

What About Hedge Funds?

Hedge funds represent another category of alternative investments frequently marketed to affluent investors.

Unlike traditional private equity funds, hedge funds may employ a broad assortment of strategies involving long and short positions, derivatives, leverage, arbitrage, and other techniques.

Some hedge funds seek higher absolute returns. Others attempt to reduce market exposure or profit during difficult economic environments.

These strategies can produce materially different investment results, so it would be inappropriate to assume every hedge fund exhibits identical risks or performance characteristics.

Nevertheless, our objections are philosophical as much as structural.

Many hedge funds charge substantial fees, operate with comparatively limited transparency, and introduce additional manager-specific risks and complexity.

For investors, the critical question remains whether any potential benefits justify these additional costs and constraints.

We believe a carefully constructed portfolio of publicly traded investments can provide the diversification, risk management, and long-term growth characteristics our clients require without introducing another layer of unnecessary complexity.

Our Investment Philosophy: Evidence Over Exclusivity

At Almega Wealth Management, we do not believe sophisticated investing necessarily requires complicated investments.

In fact, some of the most consequential investment principles are remarkably straightforward.

Our portfolios emphasize broad diversification, disciplined asset allocation, relatively low investment expenses, and systematic exposure to characteristics historically associated with differences in expected returns, including company size, relative price, and profitability.

These principles are supported by extensive academic research and are central to our investment approach.

We also recognize private investments can offer legitimate diversification benefits. Dimensional’s own research acknowledges this possibility.

However, diversification is not free, and an investment providing some diversification benefit is not automatically a sensible addition to every portfolio.

We believe the potential advantages of traditional private equity and hedge funds generally fail to justify their costs, liquidity restrictions, and implementation challenges within our clients’ portfolios.

Our responsibility is not to provide clients with the most elaborate collection of investments.

It is to develop an investment strategy capable of helping them accomplish their financial objectives.

Complexity is not synonymous with sophistication, and exclusivity is not evidence of superior investment performance.

The Bottom Line: Is Private Equity Worth It?

For some institutional investors and exceptionally well-resourced individuals, certain private investment opportunities may be appropriate.

We do not suggest otherwise.

But investors contemplating private equity should carefully consider several questions.

Does the investment offer a reasonable expectation of outperforming comparable publicly traded alternatives after all fees? Is the potential diversification benefit substantial enough to justify the additional complexity? Can the investor comfortably surrender access to the committed capital for many years? And perhaps most importantly, is the investor being compensated appropriately for the additional risks?

At Almega Wealth Management, our conclusion is straightforward.

We would rather own a diversified portfolio of transparent, liquid, cost-conscious investments supported by academic evidence than pursue expensive, complicated investments simply because they carry the allure of exclusivity.

Successful investing is not about gaining admission to an exclusive club.

It is about maximizing the probability of achieving your financial objectives while exercising thoughtful control over risk, expenses, and the variables within your influence.

Sometimes, the most sophisticated investment decision is recognizing when an opportunity is better left unexplored.

Frequently Asked Questions About Private Equity Investing

Is private equity better than investing in stocks?

Not necessarily. Research from Dimensional Fund Advisors found private equity buyout funds historically outperformed the S&P 500 on average over its sample period, but slightly underperformed publicly traded small-cap value stocks when compared on a cash-flow-adjusted basis. Results depend heavily upon the benchmark, manager, fees, and investment period.

What are the biggest risks of private equity investing?

Important risks include limited liquidity, high fees, leverage, uncertain interim valuations, substantial differences in manager performance, and the possibility of losing invested capital.

Can you lose money investing in private equity?

Yes. Private equity investments are not guaranteed. Individual investments and entire funds can experience significant losses, particularly when acquired businesses encounter financial difficulties or excessive borrowing.

Why do wealthy investors invest in private equity?

Private equity may provide access to businesses unavailable through public stock exchanges, opportunities for operational improvements, and potentially valuable diversification. However, wealth or accredited-investor eligibility does not automatically make an investment appropriate or economically advantageous.

Are hedge funds worth the fees?

Their value depends upon the strategy, manager, fees, and benefits delivered to the investor’s overall portfolio. Some hedge funds may offer useful risk-management or diversification characteristics, but high expenses and manager-selection challenges can make the value proposition difficult to justify.

Can I get exposure to private companies through the stock market?

Yes, indirectly. Many publicly traded corporations invest in privately held businesses through subsidiaries, venture capital operations, or direct investments. Owning shares of those public companies provides indirect economic exposure to such investments, although the exposure differs from owning a private equity fund.

Is Private Equity a Good Investment? Why We Avoid Private Equity and Hedge Funds