U.S. stock market returns have been stuck in neutral this year due to high valuations and declining profit margins, and returns are expected to remain sub-par over the next years. As such, some folks have been wondering whether they should diversify away from public equities.

Clients have asked us about real estate, angel investing, peer-to-peer lending, buying precious gems, farmland and even artwork.  But the most-often mentioned alternative is private equity as we (sometimes) see how public pensions and endowments are able to boost returns with this asset class.

The Financial Times just posted a very interesting article last week summarizing new research that finds that the average performance of buyout funds after fees is worse than s simple passive investment in the S&P 500.  That’s not to say there are good ones – as the article points out, from 1993 through 2012, the average performance gap between the private equity firms in the top and bottom quartiles was more than 15 percentage points per year. The problem is the same old one of finding the top quartile one (that is still open to investors) and who is willing to accept a small, say $100,000-$300,000 commitment.

This is very tough to do, and being wrong can be very costly given the very high fees to participate and the need to lock up the money for many years.