Steven Brod, CEO and CIO of Crystal Capital Partners, LLC, the portfolio-centric alternative investment platform for financial advisors.

A UBS survey reports that over the last two decades, state and local government pension funds have significantly increased allocations to alternative investments—from 9% in 2001 to 34% in 2022—while reducing exposure to more traditional asset classes like public equities and fixed-income. Alternative investments broadly comprise private equity, hedge funds, real estate, commodities and private credit.

That said, the complex landscape of investment management still poses challenges for smaller endowments and pensions. With limited resources and high operational costs relative to their peers, smaller endowments and pensions often battle resource constraints that larger investors can sidestep with ease. A key quandary is efficiently deploying assets while keeping costs under control—a juggle involving administrative expenses and investment management fees. Reliance on consultants and alternative investment platforms has become a strategy to tap into this asset class when in-house teams cannot cover it on their own.

The Alternatives Trend

The move toward alternatives picked up pace in the aftermath of the 2008–09 Global Financial Crisis, which saw extreme market volatility. According to UBS, this trend has accelerated over the last few years, as the pandemic took its toll on financial markets in 2020. The Federal Reserve’s aggressive monetary tightening also induced substantial asset price drawdowns and market volatility in 2022. Additionally, private equity investments have shown strong performance over the last 23 years, per Cliffwater’s research.

State pensions that have focused on private equity have achieved an impressive net-of-fee annualized return of 11.0% through June 30, 2023, surpassing the 6.2% return from public stocks by a significant margin. Despite experiencing a challenging year in 2023 with a modest 0.8% return, private equity has demonstrated resilience over longer time frames. The Cliffwater study examines returns across three market cycles, encompassing bear and bull markets, and shows how private equity thrived across various economic conditions. Endowments and pensions, with their longer investment horizons and lower liquidity needs, are particularly well-suited to take advantage of the liquidity premium of private equity, thereby enhancing the overall return potential of their portfolios.

Alternative Investment Platforms As Enablers

Alternative investment platforms provide smaller pensions and endowments with the means to manage investments more efficiently and at reduced costs. These platforms can democratize access by offering qualitative data and quantitative tools that were once the prerogative of larger entities. By pooling resources from multiple investors, these platforms can reduce the financial barrier to entry, allowing individuals to participate in potentially lucrative ventures with lower capital requirements.

Furthermore, they offer transparency, education and sometimes lower fees compared to traditional investment avenues, empowering smaller investors to build diversified portfolios and potentially enhance their returns. In essence, alternative investment platforms are leveling the playing field, enabling investors of all sizes to tap into previously inaccessible markets and offering opportunities like those afforded to larger investors.

The Takeaway

Despite ambitions to raise returns, a balanced approach must be maintained. The increased role of alternative investments comes with considerations regarding illiquidity and complexity, yet the market has made it clear that alternatives cannot be ignored. Small endowments and pensions must chart a course through an ocean of investment options. The strategic shift toward private equity is not merely a passing trend but a well-considered move supported by empirical evidence and the pursuit of risk-adjusted returns.

With the data showing its place in achieving long-term profit and managing risk exposures, private equity is likely to remain a fundamental element of investment strategies, promising both growth and stability in the evolving investment landscape. By steering cautiously yet boldly toward strategic alternative investments and making use of the innovative platforms available, smaller institutional investors can aim for a prosperous financial future.


While smaller pensions and endowments are increasingly leaning into alternative investments to enhance returns, it’s crucial to approach this shift with a balanced perspective, acknowledging inherent risks and complexities. The allure of higher returns from alternative assets such as private equity, hedge funds and real estate comes with increased exposure to illiquidity and operational intricacies. These investments often involve longer commitment periods and more complex valuation processes compared to traditional assets, making them less liquid and potentially harder to divest in adverse market conditions.

Smaller institutions should be vigilant about the fees often associated with alternative investments and the impact they can have on net returns. Due diligence is paramount when selecting funds or firms to work with, as the quality and transparency of management can vary significantly. Looking out for firms with strong track records, transparent reporting practices and aligned interests is essential.

In navigating these challenges, smaller pensions and endowments must remain focused on their long-term investment objectives, aligning their portfolios with their risk tolerance, liquidity needs and mission-related goals. By doing so, they can strategically incorporate alternative investments into their portfolios, potentially unlocking enhanced returns while managing the risks associated with this asset class.

The information provided here is not investment, tax, or financial advice. You should consult with a licensed professional for advice concerning your specific situation.

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