The Institutional Cost Mirage
Richard Ennis's Latest Critique of Alternative Investments
In the evolving landscape of institutional investing, few critiques strike as surgically and systematically as Richard Ennis's most recent indictment of the "alts" phenomenon. Ennis, who co-founded the investment consultancy firm Ennis Knupp & Associates, has long been known for his rigorous scrutiny of institutional performance. In his latest paper, Ennis lays bare the structural flaws and long-term underperformance endemic to private equity, hedge funds, and private real estate.
Ennis argues that the heavy reliance on alternative investments has not only failed to justify its cost but has actively degraded institutional performance—especially post-GFC. The primary reason for this underperformance is simple: alts are just too expensive. He references Lim (2024), who finds that private market investments typically incur a cost drag of 5% to 8% per annum, reflecting fees and carried interest. This implies a near-insurmountable hurdle for these assets to generate excess return.
Figure 1: Estimated Cost of Private Market Investments
Source: Lim (2024), as presented in Ennis (2025)
Ennis develops a model correlating alts allocation with total expense ratios for public pension funds, demonstrating that portfolios heavily tilted toward alternatives can easily incur annual costs exceeding 3.6%. Compare this to the near-zero fees of public market index strategies, and the scale of value destruction becomes self-evident.
The paper methodically walks through the three pillars of alts—private real estate, hedge funds, and private equity—and demolishes their supposed value add. The data are damning:
Private real estate underperforms REITs by 2.5% per year over 25 years.
Hedge funds trail matched public benchmarks by 0.5% per annum post-GFC, with institutional Sharpe ratios significantly inferior to both equities and bonds.
Private equity has returns that are 1.18 times its Public Market Equivalent (PME), but this is before adjusting for a beta of 1.8. Ennis also highlights that performance persistence is diminishing, market structures have changed, and the leverage tailwind has evaporated after the era of near-zero interest rates. Private equity returns are looking more like public equity returns—just slower, less liquid, and far more expensive.
Ennis evaluates how these high-cost, low-return assets affect total fund performance. Using data from 50 large U.S. public pensions, he constructs a composite return series and benchmarks it against a risk-matched public index. The result is that public funds underperform by 96 bps annually, while large endowments lag by a staggering 240 bps.
Figure 2: Cumulative Relative Wealth for Public Funds and Endowments
Source: Ennis (2025)
Perhaps the most compelling evidence comes from a cross-sectional regression linking alts allocation to excess return. Each additional 1% allocated to alternatives reduces excess return by 7.1 bps.
Figure 3: Alts Allocation vs. Excess Return
Source: Ennis (2025)
Ennis doesn’t stop at the numbers—he diagnoses the underlying governance dysfunctions. From conflicted benchmarks to misaligned incentives (e.g., CIOs earning bonuses by beating benchmarks they help design), the system incentivizes complexity and opacity over clarity and stewardship. This misalignment, he argues, perpetuates the status quo, even as underperformance compounds over time.
Just as retail investors slowly migrated to indexing over the past two decades, institutional portfolios may eventually wean off high-cost alts. Ennis forecasts a gradual unwinding rather than a dramatic pivot, driven by a growing awareness among trustees and perhaps some hard reckonings—lawsuits, liquidity crises, or sheer peer pressure.
Ennis’s core principles are that simplicity scales and costs matter, enormously. If institutional investors can’t justify the cost of complexity with demonstrable alpha, the rational path is clear: in a world where long-term compounding is paramount, minimizing cost drag is not just a preference—it’s a fiduciary imperative.