Alternative Investments - Leverage, Risk, and Fees, Oh My

Alternative investments previously made available only to high net worth accredited investors are being made available to main street investors.  Private credit, private equity, hedge funds, and multifamily real estate investments are now offered to investors with $50,000 net worth. 

I have read through several prospectuses from financial advisors and fund principals.  Here is my understanding:

• Much higher potential returns.   Often the returns are in the 10-15% range, much higher than I can get from CDs, bonds or stock index funds. Alternative investments have given higher returns consistently for many years. Of course, returns are not guaranteed.
• Leverage.   Many of the funds use leverage to achieve returns by borrowing funds to boost returns.
• Risk.  Of course, higher returns usually involve higher risk, meaning the possibility of not achieving expected returns or even losing money. 
• Fees.   The cost for participating can be high in the form of fees, which is how the offering party earns money for finding or assembling the alternative investments.  These fees are paid even if the investment does not deliver expected returns.
• Lockup periods.  Many of  these investments have lockup periods of 5-10 years before return of principal or limited withdrawal windows. 

My assessment.    The opportunities look attractive, but the space is getting more crowded and returns are starting to go lower.   

This reminds of the time in 2007 with collateralized debt obligations (CDOs) which grouped subprime mortgage debt in notes that were "safe" since the debt was diversified and a few defaults would not affect them.   They offered higher returns for higher risk that was masked by diversification.   In 2008 there massive defaults which caused the bonds to move towards worthless.   Several investment banking firms when bankrupt, which was followed by the Great Recession.

Are alternative investments for me?  Not so much. I have declined putting funds in alternative investments at this time.   I know I am missing out on higher returns, but I don't want to be investing in them when they stop working and create big losses.

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This is not financial nor investment advice. Please consult a professional advisor.

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