XEQT vs Private Equity & Alternative Investments: What Canadian Retail Investors Need to Know

A guy I went to university with – I’ll call him Marcus – showed up at a backyard barbecue last summer and spent the entire evening talking about his private equity investment. He had put $50,000 into some fund-of-funds product that one of these new alternative investment platforms was offering to retail investors in Canada. “Institutional-grade returns,” he kept saying. “This is what the pension funds buy. This is how the really wealthy people invest.”

I asked him what the fees were. He didn’t know exactly. I asked about the lockup period. “A few years, I think.” I asked what companies the fund actually owned. He couldn’t name a single one. But he was certain – absolutely certain – that this was going to crush the stock market over the next decade.

I went home that night and looked up my XEQT portfolio on Wealthsimple. Boring as always. 9,000+ stocks across 49 countries. 0.20% MER. Completely liquid. No lockup. No mystery. No smooth-talking platform promising me access to the “exclusive” world of institutional investing.

And I felt genuinely great about it.

Because here is the thing the alternative investment industry does not want you to know: for the vast majority of Canadian retail investors, these products are a worse deal than a simple, low-cost global equity ETF. The fees are higher. The liquidity is worse. The reported returns are inflated by survivorship bias. And the “institutional-grade” experience you are buying into bears almost no resemblance to what actual institutions like the Canada Pension Plan get.

This post is going to walk you through exactly why – not because alternatives are inherently bad, but because the current marketing wave targeting Canadian retail investors is built on half-truths, and you deserve the full picture.

1. What Are “Alternative Investments,” Anyway?

The term “alternatives” is a catch-all for any investment that is not a traditional stock, bond, or cash holding. The major categories you will encounter as a Canadian retail investor include:

Private Equity (PE): Funds that buy private companies (or take public companies private), restructure them, and sell them for a profit years later. Think buyout firms like Brookfield, KKR, or Blackstone. The classic holding period is 7-10 years.

Hedge Funds: Actively managed funds that use complex strategies – long/short equity, global macro, event-driven, quantitative trading – to generate returns that are supposedly uncorrelated with the stock market. They aim to make money in both up and down markets.

Real Estate Syndications and Private REITs: Pooled investments in private real estate deals – apartment buildings, commercial properties, development projects. Different from publicly traded REITs like XRE, which trade on the stock market and can be bought and sold instantly.

Venture Capital (VC): Investing in early-stage startups before they go public. Extremely high risk, occasionally massive returns. Think of being an early investor in Shopify before its IPO.

Private Debt/Credit: Lending money directly to companies or projects in exchange for interest payments. Similar to bonds, but without public market liquidity.

Infrastructure: Investments in roads, bridges, utilities, airports, and renewable energy projects.

Each of these has a legitimate role in the portfolios of large institutions. The question is whether they make sense for you – a Canadian retail investor with normal savings and normal financial goals.

2. Why You Are Suddenly Hearing About Alternatives Everywhere

Five years ago, no one at a barbecue was talking about private equity. Now every other finance podcast is running ads for platforms that promise to “democratize” access to alternatives. What changed?

• New fintech platforms have emerged in Canada and the US (think companies like Moonfare, iCapital, Yieldstreet, and various Canadian offerings) that package alternative investments for retail investors with lower minimums – sometimes as low as $10,000 or even $1,000
• Regulatory changes have made it easier for accredited and, in some cases, non-accredited investors to access private market deals
• Low interest rates throughout 2020-2023 pushed investors to seek higher yields, and alternatives were marketed as the answer
• The “Yale Model” mystique – the Yale University endowment famously earned enormous returns through a heavy allocation to alternatives, and this story has been aggressively marketed to retail investors as proof that alternatives are superior

But here is what the marketing materials leave out: the version of alternatives available to you as a retail investor is fundamentally different from what institutions access. More on that in a moment.

3. The Fee Problem: 2-and-20 Is Just the Beginning

Let us talk about the elephant in the room. Fees.

The traditional fee structure for private equity and hedge funds is called “2 and 20”: a 2% annual management fee plus 20% of profits. Some funds charge even more. Some add additional layers.

To put this in perspective, here is how the fee structures compare:

And it gets worse. Many “retail-accessible” alternative platforms add an additional layer of fees on top of the underlying fund’s fees. You are paying the platform a fee for the privilege of accessing a fund that already charges 2-and-20. It is like paying a cover charge to enter a restaurant that also charges for the food.

I have written before about how even a 1% fee difference can cost you over $200,000 over a lifetime. Now imagine a 3-5% total fee drag. Let me show you what that looks like.

Assumptions: $100,000 invested, 8% gross annual return, 30-year horizon.

At a 3.5% total cost, you lose over $560,000 compared to XEQT on a $100,000 investment. That is not a rounding error. That is a retirement.

For those fees to be worth it, the alternative investment would need to consistently generate gross returns 3-5% higher than the global stock market. As we will see, that almost never happens.

4. The Illiquidity Trap: Your Money Is Locked Up and You Cannot Leave

When you buy XEQT, you can sell it at any time during market hours. The trade settles in one business day. If you need cash for an emergency, a down payment, or a career change, your money is there.

Alternative investments are a completely different animal.

Typical lockup periods:

• Private equity funds: 7-12 years. You commit your capital and cannot get it back until the fund winds down. Some funds allow limited secondary market sales, but often at a significant discount.
• Hedge funds: 1-3 year initial lockups are common, with quarterly or annual redemption windows after that. Some funds impose “gates” during market stress, meaning they literally refuse to give you your money back when you need it most.
• Real estate syndications: 3-7 years typically. You are locked in until the property is sold or refinanced.
• Venture capital: 10+ years. You might not see a return for a decade.

This illiquidity is not just an inconvenience. It is a genuine risk. Imagine you invested $50,000 in a private equity fund in 2019, right before the pandemic. In March 2020, you lose your job. Your XEQT-holding neighbour sells a portion of their portfolio to cover expenses. You? Your money is locked up for another six years. You end up taking on high-interest debt instead.

Illiquidity is often marketed as a feature – “it prevents you from panic-selling!” – but true discipline is having the ability to sell and choosing not to. Being unable to sell when you need to is not discipline. It is a trap.

5. The Survivorship Bias Problem: Why Reported Returns Are Inflated

I have written an entire post about survivorship bias and how it distorts your perception of investing. The problem is especially severe in alternative investments.

Here is why:

Private equity funds that fail or underperform are often excluded from industry databases. When a PE firm launches 10 funds and three are disasters, those three quietly disappear from the track record. The surviving seven get marketed aggressively. Industry-reported returns reflect only the survivors.

Hedge fund databases are voluntary. Funds report their returns to databases like HFR or Morningstar only if they choose to. Guess which funds choose to report? The ones with good numbers. A 2017 study in the Journal of Financial Economics estimated that survivorship bias inflates reported hedge fund returns by 3-5% per year. Let me repeat that: 3-5% per year of the returns you see quoted for hedge funds may simply not exist.

Backfill bias adds another layer. When a new hedge fund joins a database, it often “backfills” its historical returns – including only the good years before it started reporting. Nobody knows about the terrible ones.

Real estate syndication returns are often based on appraisals, not actual sales. A property might be “valued” at a 15% gain on paper, but until it sells, that return is theoretical. During downturns, appraisals lag reality, making returns appear smoother and higher than they are.

When you see a headline like “Private equity has returned 14% annually,” that number is contaminated by survivorship bias, backfill bias, appraisal smoothing, and selective reporting. The actual median investor experience is significantly worse.

Compare that to XEQT: publicly traded stocks, transparent real-time pricing, no survivorship bias because you own the entire market. What you see is what you get.

6. Institutional Returns Are Not Your Returns

This is the single most important thing to understand about alternative investments.

When people cite the success of the Canada Pension Plan Investment Board (CPPIB), Ontario Teachers’, or the Yale Endowment as evidence that alternatives “beat the market,” they are committing a fundamental error. Institutional investors and retail investors do not get the same deal. Not even close.

Here is why:

The CPPIB has returned roughly 10% annualized over the past two decades. Impressive – but CPPIB negotiates fee discounts, accesses the best funds, co-invests directly alongside managers (bypassing fees entirely on some deals), and has a 75-year investment horizon that no individual can replicate.

The retail investor buying a fund-of-funds product through an app? They are getting the leftovers. The best PE and VC managers are oversubscribed and do not need your $25,000. They are taking $200M checks from sovereign wealth funds. Research has shown the difference between top-quartile and bottom-quartile PE funds is often 10% or more per year. Institutions access the top quartile through relationships built over decades. Retail investors get whatever is left.

7. The Full Comparison: XEQT vs the Alternatives

Let me put it all in one table. This is the comparison that should inform your decision.

The “realistic net-of-fees return for retail” row is the one that matters. Strip away survivorship bias, account for the full fee stack, and recognize that retail investors do not access top-quartile funds, and the return advantage of alternatives largely evaporates.

8. The Hedge Fund Reality Check

Hedge funds deserve special attention because they have perhaps the widest gap between reputation and reality.

Some hedge fund managers genuinely are extraordinary. But here is what the aggregate data shows:

• Over the 15 years ending 2024, the HFRI Fund Weighted Composite Index (a broad measure of hedge fund returns) returned approximately 5-7% annually. Over the same period, a simple 60/40 portfolio of stocks and bonds returned roughly 7-8%, and a 100% global equity portfolio returned 9-10%.
• Warren Buffett famously bet $1 million in 2007 that an S&P 500 index fund would beat a basket of hedge funds over 10 years. He won easily. The index fund returned 125.8% cumulatively. The hedge fund basket returned 36%.
• After fees, the average hedge fund has underperformed a basic stock index in most periods since the 2008 financial crisis. The “alpha” that hedge funds claim to generate has been largely consumed by their own fees.

Now remember: these reported returns still include survivorship bias. The actual median experience is even worse.

“But hedge funds protect you in downturns!” is the common rebuttal. Some do. But XEQT’s global diversification already provides significant diversification benefits, and you can pair it with bonds or cash if downside protection is your priority – without paying 2-and-20 for the privilege.

9. When Alternatives Actually Might Make Sense

I want to be fair here. I am not saying alternatives are a scam. They are not. There are specific situations where they can add value to a portfolio. But those situations are narrower than the industry wants you to believe.

Alternatives might make sense if:

• You are an accredited investor with a net worth above $1M+ (excluding your primary residence) and your basic financial plan is already fully funded. TFSA maxed, RRSP maxed, healthy emergency fund, on track for retirement. At this point, a small allocation for diversification is reasonable – not necessary, but reasonable.

• You have access to top-quartile funds through professional relationships. If you can invest directly with a reputable PE or VC firm (not through a fund-of-funds), the math changes. This applies to very few people.

• You understand and can truly afford the illiquidity. The locked-up money is genuinely money you will not need for 10+ years, and losing it entirely would not change your lifestyle.

• You are investing alongside a fiduciary advisor with deep experience evaluating alternative fund managers, strategies, and fee structures. Not a salesperson on a platform.

• You want specific exposure that public markets cannot provide. For example, a local real estate development you understand deeply, or a friend’s startup where you have personal conviction.

Alternatives almost certainly do NOT make sense if:

• Your TFSA and RRSP are not yet maxed out – fill those first
• You are investing less than $500,000 total
• You do not fully understand the fee structure (ask yourself: can you calculate the total annual drag on a napkin right now?)
• You are attracted primarily by the marketing or the feeling of exclusivity
• You would need to sell other investments or reduce your regular XEQT contributions to fund the alternative allocation
• You are relying on reported return numbers without adjusting for survivorship bias

If you are reading this blog, you are almost certainly better served by a 100% XEQT portfolio – or at most, a core-satellite approach where 80-90% is XEQT and 10-20% goes into whatever scratches your itch. That satellite allocation is better spent on publicly traded stocks or sector ETFs than on illiquid alternatives with opaque fee structures.

10. The XEQT Simplicity Advantage

Let me zoom out for a moment and remind you what you get with XEQT, because it is easy to take simplicity for granted when the industry keeps telling you that complexity is sophistication.

When you buy one share of XEQT, you own:

• ~9,000 stocks across the entire developed and emerging world
• 49 countries of geographic diversification
• Every sector – technology, healthcare, financials, energy, consumer, industrials, all of it
• Automatic rebalancing by BlackRock at no extra cost to you
• Complete liquidity – sell any business day, settlement in one day
• Full transparency – every holding is publicly disclosed
• 0.20% MER – one of the lowest total costs available for a globally diversified portfolio
• Tax efficiency in registered accounts (TFSA, RRSP, RESP, FHSA)
• Commission-free trading on platforms like Wealthsimple

No lockups. No capital calls. No K-1 tax forms. No gated redemptions. No mystery holdings. No hoping you got into a top-quartile fund. No platform fees on top of fund fees on top of performance fees.

Just one ETF, bought regularly, held forever. The same basic approach that has outperformed the majority of professional money managers over every meaningful time period.

The alternative investment industry has spent billions convincing people that simplicity is naive and complexity is sophisticated. The data says the opposite. Simplicity, executed consistently, beats complexity almost every time. XEQT is that strategy for most Canadians.

The Bottom Line

The alternative investment industry is having its retail moment. Slick platforms, compelling marketing, and the allure of “investing like the institutions” are drawing Canadian investors into products they do not fully understand, with fees they cannot fully calculate, locked up for periods they have not fully considered.

Here is what I want you to take away:

1. The fees are brutal. A total cost of 3-5% annually means you need to dramatically outperform the market just to break even with XEQT’s 0.20%.
2. The reported returns are inflated. Survivorship bias, backfill bias, and appraisal smoothing make alternatives look better on paper than they deliver in practice.
3. You are not getting the institutional deal. CPPIB and Yale get the best funds at negotiated fees. You are getting retail products at full price.
4. Illiquidity is a real risk, not a feature. Locking up your money for 7-12 years introduces risks that a liquid portfolio does not have.
5. XEQT already gives you global equity exposure – 9,000 stocks, 49 countries, automatic rebalancing – for 0.20% per year. The bar for alternatives to clear is much higher than most people realize.

Marcus texted me a few months after the barbecue. The PE fund had sent out its first quarterly update. Returns were “in line with expectations,” which in private equity language means “nothing has happened yet, but we are still charging you fees.” His $50,000 was locked up and inaccessible.

My XEQT? Still boring. Still liquid. Still compounding. Still costing me almost nothing.

I would not trade it for anything.