The little book of alternative investments

What this book actually teaches

The Little Book of Alternative Investments: Reaping Rewards by Daring to Be Different (2011) by Ben Stein and Phil DeMuth is a skeptic's tour of the alternative investment universe — hedge funds, private equity, managed futures, real estate, commodities, currencies, and more — written by two authors who are generally unconvinced that most retail investors have the access, information advantage, or cost structure to benefit from them. The book's thesis is not that alternatives are always bad but that the case for them, as typically pitched to individual investors, does not survive scrutiny when fees, liquidity constraints, manager selection risk, and the actual evidence on returns are examined carefully.

Stein and DeMuth work through the major alternative categories methodically. On hedge funds, they examine the return data and find that after fees — typically a 2% management fee plus 20% of profits — the majority of hedge funds have not delivered the risk-adjusted excess returns that justify their cost structure relative to a simple stock-bond index portfolio. Manager selection matters enormously, top managers are capacity-constrained and largely inaccessible to ordinary investors, and the returns available to institutional investors with first-mover access are not the returns available to retail allocators who access hedge fund exposure through funds of funds with a second layer of fees.

The treatment of commodities, managed futures, and real estate is similarly evidence-grounded. The authors acknowledge that some alternatives — particularly low-cost diversified real estate exposure through REITs and certain commodity exposure through index instruments — can provide genuine diversification benefits at reasonable cost. The distinction they draw consistently is between alternatives that add diversification value at a cost that retail investors can actually access, and alternatives whose return profiles are primarily attractive at the institutional level and whose costs and access constraints eliminate the benefit for individual investors.

For readers looking for what Stein and DeMuth actually recommend, the book converges on a relatively conventional answer: a diversified portfolio of low-cost stock and bond index funds captures most of the return available to long-term investors, and the incremental diversification benefit from adding most alternatives is not worth the complexity, illiquidity, and cost. The exception they carve out is for a modest REIT allocation and potentially commodity exposure through low-cost index instruments.

The weaknesses are primarily about scope and audience calibration. The book covers a wide range of alternative categories at a level of depth that satisfies neither a practitioner who wants rigorous quantitative analysis nor a true beginner who needs more foundational context. The 2011 publication date also predates significant developments in alternative investment access — liquid alternatives funds, interval funds, and direct indexing platforms that have changed the cost and access landscape for some strategies.

For individual investors who are being pitched alternative investment products and want a skeptical, evidence-grounded framework for evaluating those pitches, The Little Book of Alternative Investments is a useful counterweight to the marketing materials they are likely receiving from advisors and fund companies.

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About Stein Benjamin

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