7 Mistakes You're Making with Alternative Investments (and How Institutional Investors Fix Them)

Look, alternative investments aren't rocket science: but they're also not something you wing on a Tuesday afternoon after reading a few blog posts.

The gap between how individual investors approach alternatives versus how institutional players like family offices and endowments handle them? It's massive. And it's costing you real money.

After years working with both types of investors, I've seen the same mistakes repeated over and over. The good news? Every single one is fixable. Let's break down the seven biggest blunders and how the pros actually handle them.

Mistake #1: Jumping In Without Clear Objectives

Here's what typically happens: Someone hears private equity returns averaged 15% last year, so they dump capital into the first opportunity they find.

That's not a strategy. That's gambling with better marketing.

Institutional investors start by asking three questions before committing a single dollar:

• Are we seeking capital preservation, income generation, or aggressive growth?

• How does this specific alternative fit our existing portfolio?

• What problem are we solving by adding this asset class?

The difference is night and day. A pension fund allocating to private equity for income generation will choose completely different strategies than a family office seeking growth. One might focus on buyouts with consistent distributions, while the other targets venture capital with 10x potential.

Before you invest in any alternative, write down your specific objective. If you can't articulate it clearly, you're not ready to commit capital.

Mistake #2: Underestimating Complexity and Risk

Alternative investments come with layers of risk that traditional stocks and bonds don't touch. We're talking leverage, illiquidity, manager risk, operational complexity, and strategies that can implode when markets turn.

Individual investors tend to see "hedge fund" or "private credit" and assume it's inherently safer because it requires accreditation. That's backwards thinking.

Institutional investors dig deep into:

• How much leverage is embedded in the strategy

• Sensitivity to economic downturns and rate changes

• Regulatory risks that could impact performance

• Correlation with existing portfolio holdings

At Mogul Strategies, we've seen too many investors chase yield without understanding the underlying mechanics. A 12% return looks great until you realize it's backed by 3x leverage in a rising rate environment.

The institutional approach? Map every risk factor before signing anything. If you can't explain the downside scenarios to someone else, you don't understand them well enough.

Mistake #3: Ignoring Your Liquidity Needs

This one kills portfolios faster than anything else.

You lock up 60% of your investable assets in illiquid alternatives, then life happens: unexpected expenses, better opportunities, or just a market dislocation where you need cash. Now you're forced to sell liquid holdings at the worst possible time or tap into secondary markets at steep discounts.

Family offices learned this lesson the hard way during 2008 and again in 2020. The smart ones now maintain dedicated liquidity buckets:

• Operational reserves (12-24 months of expenses)

• Opportunity capital (to deploy during dislocations)

• Emergency liquidity (the "sleep well at night" fund)

The rule of thumb? Never have more than 40-50% of your portfolio in truly illiquid assets unless you have other sources of liquidity. And actually run scenarios for what happens if you need cash when alternatives are locked up.

Mistake #4: Not Understanding Fee Structures

Here's a fun exercise: Ask ten investors what they're actually paying in total fees for their alternative investments. Maybe two can tell you accurately.

The "2 and 20" structure everyone talks about? That's just the beginning. Add in:

• Fund organization and setup fees

• Administrative and operational costs

• Transaction fees on deals

• Potential tax inefficiencies

A seemingly attractive 14% gross return can become 8% net after all fees and expenses. That dramatically changes whether the investment makes sense.

Institutional investors demand complete fee transparency before committing. They compare total cost structures across managers and negotiate where possible. More importantly, they understand what they're paying for and whether it's worth it.

The question isn't whether fees are high or low: it's whether the net returns justify the gross fees. A manager charging 2.5% and 25% who consistently delivers top-quartile performance might be worth more than a 1% and 10% manager who's perpetually mediocre.

Mistake #5: Skipping Manager Due Diligence

You wouldn't hire someone to manage your business without checking their background. So why would you hand them millions to invest?

Yet this happens constantly. Individual investors fall for smooth presentations, impressive offices, and track records they never verify. They assume someone else did the homework.

Institutional investors treat manager selection like investigative journalism:

• Verify claimed performance with audited financials

• Check references from multiple existing investors

• Examine the team's experience in different market cycles

• Ensure alignment (does the GP have meaningful personal capital invested?)

• Review any regulatory issues or past fund failures

The performance gap between top-quartile and bottom-quartile managers in private equity regularly exceeds 15%. In venture capital, it's even wider. Manager selection isn't a nice-to-have: it's the single most important decision you'll make.

If you don't have the resources to conduct thorough manager due diligence, you probably shouldn't be investing in that alternative directly. Consider accessing it through a vetted fund-of-funds or working with firms that have dedicated diligence teams.

Mistake #6: Over-Concentrating in Specific Alternatives

Diversification is great. Until you realize you're not actually diversified.

I've seen portfolios with allocations to six different private equity funds: all focused on middle-market buyouts in the same sectors. That's not diversification, that's concentration with extra steps and higher fees.

Common concentration traps:

• Multiple real estate investments in the same geographic market

• Several "different" crypto strategies that are all just long Bitcoin

• Private credit funds all lending to similar borrower profiles

• Hedge funds with different names but highly correlated strategies

Sophisticated investors diversify across:

• Strategy types (equity, credit, real assets, digital assets)

• Geographic regions

• Industry sectors

• Vintage years (especially for private equity and venture)

• Manager styles and philosophies

At Mogul Strategies, we help clients map actual exposure across their alternatives portfolio. Often, what looks diversified on paper is highly correlated when you dig into underlying holdings and strategies.

Mistake #7: Setting It and Forgetting It

You created a beautiful allocation model three years ago: 40% stocks, 30% bonds, 30% alternatives. Perfect.

Except markets moved. Your public equities doubled while alternatives remained flat. Now you're 52% stocks, 25% bonds, 23% alternatives. Your carefully constructed risk profile? Gone.

Individual investors rarely rebalance alternative allocations because of the complexity and illiquidity involved. Institutional investors build rebalancing into their process from day one.

The sophisticated approach uses threshold-based rebalancing rather than calendar-based. If an asset class drifts more than 5% from target, it triggers a review. They also:

• Plan exit strategies before entering positions

• Identify secondary market options for illiquid holdings

• Build rebalancing into new capital deployment decisions

• Account for J-curve effects in private equity allocations

Equally important: knowing when to exit. Too many investors hold underperforming alternatives for years out of inertia or false hope. Institutional investors set clear performance benchmarks and aren't afraid to exit strategies that aren't delivering.

The Bottom Line

The difference between amateur and institutional alternative investing isn't access or capital size: it's process discipline.

Institutional investors succeed with alternatives because they:

• Define clear objectives before deploying capital

• Understand and quantify risk factors

• Maintain adequate liquidity buffers

• Demand fee transparency

• Conduct thorough manager due diligence

• Truly diversify across strategies and vintages

• Actively monitor and rebalance portfolios

You don't need a billion-dollar endowment to apply these principles. You just need to be honest about the work required and either commit to doing it properly or work with partners who already have these systems in place.

Alternative investments can absolutely enhance portfolio returns and reduce correlation to traditional markets. But only if you avoid these seven mistakes and approach them with the same discipline institutional investors have refined over decades.

The question isn't whether you should invest in alternatives. It's whether you're prepared to do it right.