Christian Faes is CEO of Faes & Co.
If you walk into a nutritionist’s office and walk out with a meal plan that consists solely of healthy salads—well, sure, it may not be the worst advice. But is it insightful? Groundbreaking? Worth paying for? Probably not. And yet this is exactly what many investors are getting from their registered investment advisors (RIAs): a portfolio packed with S&P ETFs and funds from the likes of KKR, Blackstone and BlackRock—the “salads” of investing.
The question investors should be asking: What am I actually paying for?
Today’s market environment demands more than just brand-name exposure. Recent volatility in public equities has served as a loud wake-up call. With tech-fueled concentration risk and increasingly correlated assets, diversification can’t just be a tick-box exercise. The reality is that true diversification requires looking beyond the mega-managers and exploring the opportunities presented by emerging, niche and often smaller alternative investment managers.
Public Markets: A Shrinking, Concentrated Playground
Public markets have become less representative of the broader economy and more skewed toward a small group of dominant players. The Magnificent Seven stocks—Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla—now account for nearly 35% of the S&P 500’s market cap (as of year-end 2024).
At the same time, the number of publicly listed companies in the U.S. has almost halved over the past three decades, from over 8,000 in 1996 to around 4,000 today. Fewer public companies, greater concentration and heightened volatility mean one thing: Sticking to the public markets and big-brand alternatives is no longer good enough.
The Rise Of Alternatives—And Why Smaller May Be Better
Alternative investments—like private equity, private credit, venture capital and other non-public assets—offer investors the chance to diversify away from public market risk. But even within this asset class, investors are often steered toward the largest names in the business.
That’s a mistake.
There’s a significant body of research showing that smaller or emerging managers tend to outperform their larger, more established peers—for example, research showing that fund returns can be inversely correlated to a fund’s size. The reasons are intuitive: Smaller funds are more nimble, able to pursue niche strategies and less bogged down by bureaucracy. Smaller funds don’t have the weight of capital on them, which might otherwise force them to deploy into larger, more mainstream opportunities.
Similarly, when it comes to private credit, it seems that there is evidence that this trend continues, with funds that focus on smaller loans being able to generate a premium return (to those that focus on larger loans). While these higher returns can come with a higher default rate, this has been attributed by some market commentators to the fact that smaller managers are likely to have more restrictive covenants in their loan documentation, which will necessarily see higher defaults being triggered. Larger managers that compete to deploy larger amounts of capital may be more “covenant lite” in order to be able to deploy the volume of capital. That is, the smaller manager might actually just be more risk-averse.
Data that also reinforces the view that smaller managers outperform is seen with new fund launches. Fund I performance generally outperforms subsequent funds as a manager scales up. Smaller teams and new managers are often more personally invested in the fund’s outcome. They’re hungrier. They’re faster. They aren’t trying to deploy billions of dollars, so they can go after the kinds of high-conviction, high-return-on-investment deals that simply don’t move the needle for the mega-firms.
While newer managers may carry slightly more risk and work to get comfortable with, the outperformance means that investors and their advisors should be willing to look at these managers—both in search of alpha, but also for sensible diversification.
Big Brands, Big Problems
Investors who equate size with safety should think again, as this isn’t always the case. Some of the biggest names in the game have had serious issues in recent years. In late 2022, Blackstone’s BREIT fund began limiting investor redemptions after facing a wave of withdrawal requests. KKR and Starwood faced similar challenges with their real estate investment trusts. These aren’t fringe players—they’re titans. And yet even the titans sometimes trip. Big logos don’t guarantee liquidity, transparency or performance.
The Advisor’s Role: Insight, Not Just Access
Advisors need to step up. When investors engage with a professional, they’re expecting insight, not just access to products they could find on an online brokerage or with some simple googling. The real value of an advisor lies in helping clients access and evaluate emerging fund managers, off-the-run strategies and truly diversified alternatives.
Yes, emerging managers carry risks. There’s less track record. Some funds will fail.
But these risks can be mitigated with proper due diligence. And let’s be honest: Not all risks are limited to the little guys. Sometimes the real danger is hiding in plain sight, dressed up in a glossy prospectus and a fancy logo.
If you’re aiming for genuine portfolio diversification and the potential for superior risk-adjusted returns, the data is clear: Smaller and more focused managers deserve a place at the table. Advisors who ignore this reality are doing their clients a disservice.
Otherwise, you’re just eating a fried chicken salad and telling yourself it’s going to help you lose weight. You need to demand better advice than that for your investment portfolios.
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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