At the end of 2009, Martin says NEPC data show the average large institutional fund, defined as those with more than $1 billion in assets, had committed 5% of its assets to private equity deals, 6.7% to hedge funds, and 8% to direct real estate investments. Martin says the commitments are actually a floor because deals are continuously cycling.

For instance, a pension fund seeking to make a $50 million commitment to private equity might actually invest $75 million because by the time its money is fully invested, earlier deals typically have returned all of the money invested. It might take the fund three years to get fully invested in private, hence the larger investment than the amount originally committed. Thus a specialist due diligence firm could get paid $150,000 a year (20 bps) on $75 million of assets invested in private equity deals and the typical deal is a $25 million to $30 million investment.  

Stephen McCourt, a managing principal at Meketa Investments Group of Westwood, Mass., concedes he knows little about the independent advisor business. But he has spent almost his entire career advising large institutions, and he says alternative investments require diversification.

"You really have to diversify the individual risk of any particular strategy by spreading your investments across multiple strategies," says McCourt. "If you diversify across 10 strategies, then having one strategy that's a flop is a lot less impactful. Most institutions have investments in much more than 10 strategies and it would not be atypical to have investments in 30 or 40 different strategies."

McCourt says vetting an investment is usually a three- or four-month process that takes his firm 50 to 100 man-hours at a rate of about $400 per hour. That does not include the additional time that the institutional investor's staff puts in to research the deals on their own and choose the right due-diligence firms.

As if the daunting due-diligence responsibility is not enough to make independent advisors skeptical, lower-than-expected returns being earned by institutions on private equity investment is sure to bolster negative sentiment. According to a recent story by Jenny Anderson in The New York Times, the nation's 10 largest public pension funds have paid private equity firms more than $17 billion in fees since 2000.

"But few big public funds ended up collecting the 20% to 30% returns that private equity managers often held out to attract pension money, a review of the funds' performance shows," according to the report. "Two professors, Steven Kaplan of the University of Chicago and Per Strömberg of the Stockholm School of Economics, contend that, after fees, many private equity investments just about match or even trail the returns of the broad stock market between 1980 and 2001."

Although private equity returns over the last decade have beaten the abysmal gains on stocks, cushioning some funds, the heady economic expansion leading up to the financial crisis is thought to have enticed even institutional investors to chase returns on an abundance of private equity deals brought to market during the three years preceding the 2007 credit crisis. That crop of private equity deals is not expected to deliver anything approaching the outsized returns advertised at the time they were bought by institutions. Deals were in demand, which allowed weaker ventures to raise money.

My guess is that between the heightened fear of leverage, fraud and due-diligence risk posed by private placements, the days of advisors putting together their own partnerships are probably over. At the very least, they won't be as popular with advisors over the next few years.

In the meantime, advisors seeking alternative investments are likely to find solutions in the growing list of mutual funds employing hedge fund strategies. Consultant Lake of Connecticut, for example, in April 2009 partnered Aston Funds to launch a mutual fund for investors seeking a diversified portfolio of mutual funds employing hedge fund strategies.