Simplicity: The Unsung Hero

This trend shifted into high gear in October when President Trump issued an executive order aimed at expanding access to these types of investments by allowing Americans to include private assets in their 401(k) retirement plans.

Alternatives are often promoted for their potential to diversify portfolios and enhance returns. However, as with all things in investing, there are trade-offs. The potential benefits come with some real risks.

Let’s start with the positives.

Diversification and smoother returns
Alternatives often behave differently from traditional stocks and bonds, which can help smooth out portfolio volatility. For example, private assets are priced less frequently, which can make returns appear more stable.

Access to niche markets
They also offer exposure to niche strategies and markets, such as early-stage companies or specialised real estate, that aren’t accessible through public exchanges.

Growth of private markets
Furthermore, more companies are opting to remain private to avoid the demands of public reporting and compliance. To get access to them virtually requires one to invest in private markets.

Inflation protection
In some cases, alternatives can act as a hedge against inflation, since real assets like commodities and infrastructure tend to hold their value when prices rise.

But these potential benefits come with important caveats.

First and foremost is liquidity, which is all about how quickly and easily you can turn an asset into cash without losing its value. Stocks, for instance, can usually be sold for cash in a day, and with little transaction cost, whereas many alternative investments might lock up your money for years. If you suddenly need your cash, getting it isn’t always possible. For most individual investors, liquidity isn’t just a nice-to-have feature, but rather, a critical requirement of their portfolio. Liquidity is something we believe many individual investors don’t ascribe enough value to. Liquidity gives you the flexibility to adapt to changing circumstances in life.

While liquidity risk is frequently discussed as a hypothetical drawback of alternative investments, the events of 2025 have proven it can be an all-too-real hazard. In Canada, several high-profile private real estate and loan funds had to limit investor redemptions this year after too many people tried to withdraw their money at once. Few investors welcome being “gated” and unable to access their funds. Nexus has had more than one client “trapped” in a competitor’s fund. One such client asked for their investment to be redeemed in June of 2022. They are still waiting.

To be fair, there have been some financial innovations to try to deal with this liquidity challenge in private assets (so-called “evergreen funds” that offer investors the option for periodic redemptions, say quarterly or annually). While these structures have improved liquidity compared to what existed before, they don’t fundamentally solve the problem: underlying private assets, such as office buildings or an equity stake in a start-up company, are often inherently difficult to sell quickly.

Second, there’s the issue of cost. Alternatives often come with substantial management and performance fees, which can significantly detract from overall returns. Although there is potential for enhanced returns, it is important to weigh this possibility against the certainty of higher costs.

Third is the concern that the promise of higher returns is not guaranteed. Historically, investing in the best hedge funds has been essential for achieving strong returns, since most of the returns have been produced by an elite group. One study concludes that the top 20 hedge fund managers have generated about 44% of all gains in the hedge fund industry since 1969. However, gaining access to those top-tier fund managers remains a significant challenge for the average investor (they’re often closed to most investors), even though it is widely recognised as a crucial element of success. Everyone wants to be in the VIP section, but only a few ever get past the velvet rope.

A final consideration is complexity. Many alternative strategies are difficult to understand, lack transparency, and require extensive due diligence. It’s hard enough for institutional investors to grapple with these issues, and the likelihood of success is even lower for individual investors.

This brings us to a broader point about complexity in investing. The financial industry has a tendency to make things complicated – because complexity sells. Investment providers can justify higher fees for intricate products, and investors themselves often fall for the idea that a complex problem like investing must require a complex solution. Behavioural finance tells us that people often equate sophistication with effectiveness. But these are two different things, and choosing the most complex solution doesn’t necessarily yield the best results.

In contrast, simple strategies executed well can be highly effective. For starters, they tend to be more tax-efficient due to reduced turnover. They also incur lower management fees and transaction costs over time. Nexus explored this issue in depth in our white paper called “In Search of Simplicity: In investing, does complex really mean better?” which makes a compelling case for simplicity, showing that a well-constructed balanced fund with just a few core asset classes can deliver strong returns with lower risk. The analysis works through the numbers to conclude that, over the period covered in the white paper, the Nexus Balanced Fund outperformed more complex institutional-style portfolios, even those with significant allocations to alternatives.

So, while alternative investments may have a place in some portfolios, especially for those with high risk tolerance, long investment horizons, and little need for liquidity, they are not a panacea.

For most investors, simplicity offers a more reliable path to long-term success. Successful investing is not about chasing the latest trend or assembling a portfolio with a dozen asset classes. It’s about understanding your goals, developing a plan, applying a disciplined investment process, and staying the course.