Dimensional Fund Advisors Sep 18, 2026
With Jeff Coyle, Founder of Libretto, who spent more than 30 years advising ultra-high-net-worth families and founded three advisory firms to serve them
Over the 25 years to now, US endowments have returned a little more than 1% a year less than a public market equivalent, Jeff Coyle said, and they hold roughly half their assets in alternatives.
Endowments are the argument for alternatives. They get into the funds nobody else can get into, they have permanent capital, and they were the first money into venture capital. If the asset class works anywhere, it works there.
"So if you were expecting to see positive outcomes coming from alternatives, you would see it in endowments, but that's not what happens."
Coyle spent his career building portfolios for the most affluent families, founded three advisory firms to do it, and then built the software he could not buy. He now runs Libretto, and he has spent years doing the empirical work on whether alternatives earn their fees. He retired from advising clients a couple of years ago.
The full interview is covered here so you can skip it.
Here are the 12 principles that matter.
Key Takeaways
Endowments hold about half their assets in alternatives and still trailed a public market equivalent by a little more than 1% a year over 25 years, before tax
The fee structure to beat is 2% of value plus 20% of the profits, which he calls an enormous hurdle
Private equity's correlation to public markets went from about 0.35 to 0.8 once fair value accounting replaced appraisals
A global public portfolio already holds north of 12,000 companies, so adding private companies adds little diversification
The real comparison is a private fund's after-tax return against a public fund's pre-tax return, because an ETF can pass through an estate untaxed
10 to 12 years is the full illiquidity period, and he wants a 20-year horizon before anyone starts
Evergreen funds open access and add a fee layer, which makes alternatives accessible and less desirable at the same time
Top-quartile managers do persist, but not at the moment you have to commit capital, so the persistence is not usable
Alternatives are discretionary — reasons to own them are purpose, not performance or diversification
1. What Counts as Alternative
The definition Coyle uses is a negative one.
His working definition
I think simplistically, things that really aren't available in the public markets.
Jeff Coyle
That covers venture capital, non-venture private equity, private real estate, natural resources and hedge funds, he said, which is what people generally mean by the word. The host's shorter version, which Coyle accepted, was anything not a stock or bond trading on an exchange.
The show opened with two headlines and asked for a reaction: that access to alternatives is opening up, and that alternatives face mounting scrutiny and skepticism. Coyle said the pair is the problem. If scrutiny is rising, access should be narrowing rather than widening.
He also set the wealth tiers he works with: mass affluent below $5 million, affluent from $5 million to $20 million, high net worth up to about $75 million, ultra high net worth above roughly $100 million, and enterprise families above $1 billion. Each one gets a different approach.
2. Total Wealth Comes First
Before the question of whether to own alternatives, Coyle puts everything a client owns on one page: human capital, homes, mortgages, social security, operating businesses, other private assets, estate inflows and insurance payoffs.
What that makes the portfolio
So when you think about a portfolio, the portfolio really behaves like a completion fund.
Jeff Coyle
The liquid portfolio fills the void the rest of the balance sheet leaves. Two consequences follow, and both change the allocation before any manager is picked.
Human capital crowds out the same risk
And so if you work for a large technology company, and the value of your human capital dominates your wealth, which it probably would for most mass affluent families, you don't necessarily want to load up on large growth securities.
Jeff Coyle
A tenured professor is the opposite case, the host said, and can carry more equity risk. Coyle agreed and then added the part the professor's plan usually misses.
A pension is a bond you cannot sell
And when you think about that pension, what the pension really is, it's an illiquid bond.
Jeff Coyle
That illiquid bond dominates the protective side of the household's wealth, so the liquid portfolio's job shrinks to whatever the pension does not cover. On alternatives specifically, the same logic bites: a client whose wealth is already illiquid should probably not buy more illiquidity, whatever the asset's own merits.
3. Three Sources of Return
The framework Coyle uses breaks any alternative's return into three parts, and he applies different confidence to each.
The first is enterprise risk
It's a fundamental risk of an operating business. If you're going to loan them your capital, what are you going to charge that business to access your capital?
Jeff Coyle
The second is financial engineering: taking the same business and adding leverage, buying it in illiquid form, re-engineering it. The third is skill, which he defined as a manager adding value on top of the first two by picking securities, timing markets, or changing how a business is run. He called that last one activism.
The reason the split matters is that enterprise risk is available cheaply and tax-efficiently in public markets. So the case for a private version has to rest on the other two.
4. Applying It by Asset
Coyle ran the framework across the categories.
Venture capital is mostly enterprise risk plus manager skill, with little engineering: early-stage companies with new products are genuinely risky businesses, and the skill is bringing the idea to market
Private equity historically buys small and mid-cap value companies, adds leverage, rationalizes operations and product lines, and sells to someone else. Enterprise risk is the biggest component, augmented by engineering and skill
Value-enhanced real estate is the same shape with an ugly building instead of a cheap company: buy it, put a new coat of paint on it, sell it
Opportunistic real estate is closer to venture. Buy land in the middle of nowhere and wait for civilization to arrive. His example was farms in California's Central Valley farmed for years until Sacramento grew out to meet them, at which point the homes and the Home Depot arrive. High enterprise risk, high cost of capital, a lot of skill, and it only works if you can fund the wait
Hedge funds are the hardest, because the label covers anything
Which makes it a fee structure, not an asset class
And so it's almost more like a compensation structure than really an asset class.
Jeff Coyle
Deconstructed, he said, hedge funds own publicly traded securities (stocks, bonds, futures, options) and then apply leverage, illiquidity and optionality. His gloss on optionality was a mortgage: the borrower can repay at any time, so if rates fall they refinance, which is bad for whoever owns the loan, so the lender charges more for it.
A large pool of hedge funds, on that reading, looks like a large balanced fund of equities and fixed income. He asked what a balanced fund should return after two-and-twenty fees, said not all that good, and added that this is exactly what happened.
5. Private Equity Is Next
The host raised the change in fashion: hedge funds used to be the thing people said they had to own, and private equity has taken that place.
Why hedge funds lost the room
And because of that, they're no longer the shiny object that everybody wants access to.
Jeff Coyle
And what replaced them
Private equity is the new shiny object.
Jeff Coyle
He allowed that private equity has merit, and then put the same test to it: what is the net outcome after all fees and expenses, which he said is not necessarily positive.
The warning he drew from it
So it's very possible that private equity could be the next version of the last hedge fund process.
Jeff Coyle
6. Gross Return vs Net
Coyle's starting point is that there is little economic difference between a public and a private operating company. The same systematic risks price the cost of capital, which over time becomes the return minus some default. So enterprise risk is available in public markets more cheaply and with better tax treatment, and the private version has to justify the difference.
He was explicit that the gross return should be higher. Private equity is leveraged, illiquid, and generally buying riskier businesses, all of which argue for a bigger number before costs.
The hurdle the gross return has to clear
Typical fee structure in private equity is 2% of value, and 20% of the profits. That's an enormous hurdle to overcome.
Jeff Coyle
The evidence he cited is a paper by Hendrix and Medhat at Dimensional, alongside decades of empirical work on a returns database that looks through to what the limited partners themselves earned, which avoids survivorship and backfill bias. He said that database was recently bought by a larger company.
What the research says private equity delivered
Private equity basically produced returns slightly above the S&P 500, but when you risk adjust it, and compare it to a risk adjusted benchmark, they tend to either equal the public markets, or slightly underperform in some cases.
Jeff Coyle
And where the excess went
And by the way, that makes a ton of sense, because you do have a higher expected return, but all that excess return is really going to the managers.
Jeff Coyle
Leverage raises the expected return and the risk together, he added, including the likelihood of failure in a stressed environment. Illiquidity earns a premium for the same intuitive reason: a dollar lent for ten years costs more than a dollar you can call back tomorrow.
He also flagged what an investor cannot see.
The transparency problem
Alternatives are opaque.
Jeff Coyle
An investor in a fund of companies gets some information but not the full picture, which means a degree of belief in the manager is required. The illiquidity is knowable, because you are living it. The underlying leverage is not, beyond the general fact that private equity carries a lot more of it than public markets do.
7. The Tax Comparison
The tax point is the one Coyle thinks gets skipped, and it changes the comparison rather than adjusting it.
An alternative fund buys and sells companies, so gains are realized along the way, usually as long-term capital gains. A small-cap value ETF held and never sold realizes almost nothing, and most people investing in alternatives have more wealth than they will spend, so those assets get a step-up in basis through the estate.
Which means the two returns are not comparable
So what you realize is you're actually comparing the pre-tax return of a public market investment to the after tax return of a private market investment.
Jeff Coyle
If the pre-tax returns are already similar, he said, the after-tax private return is measurably lower. The host added the administrative cost: chasing K-1s every year.
The structural reason an investor cannot simply hold for the estate is the fund's own life. Capital is committed, drawn down incrementally over an investment period of a couple of years, then returned as companies are sold.
The full lock-up
And so that typically is the full period of your lack of liquidity is somewhere between 10 to 12 years, before you get your last dollar back. So it's a long time.
Jeff Coyle
8. The Diversification Claim
The smoother ride is the other selling point, and the host named the reason for it before Coyle did: private assets are not marked to market the way an exchange reprices a stock every minute.
Coyle's account is historical. Private equity was valued quarterly using appraisals, with a lot of discretion involved, which produces the appearance of smooth returns rather than the economic volatility of the underlying business. Low measured volatility implied low correlation, and low correlation implied a diversifier. Fair value accounting arrived about 15 years ago and changed the picture.
What happened to the correlation
There's a study out there that basically identified that institutional investors thought that the correlation coefficient for private equity, which is a measure of their, I'll call it diversification value, it was something like 0.3, 0.35 a couple decades ago, and fair value accounting comes in and now it ramps up to 0.8, and starts to look an awful lot like public markets.
Jeff Coyle
Fair value is a better effort than appraisal, he said, not a perfect one, so the right posture is humility about how much diversification is left. A leveraged version of a public company has more volatility, not less.
He also took on the argument that many companies have gone private since the 1990s, so public markets no longer cover the economy.
The company count already available
If you expand that globally, you probably have north of 12,000 companies in that portfolio. So does adding private equity add meaningfully to the diversification of a portfolio with 12,000 companies in it? Probably not.
Jeff Coyle
A US total market portfolio holds roughly 2,500 companies on its own. The caveat he attached is that some genuine alternatives are nothing like a public equity: contractual cash flows, the future earnings of a pool of professional athletes, disaster insurance payoffs. Those, he said, do carry diversification value, and still have to pass the same test on cost and tax.
9. How Much, and Why
Asked whether the private sleeve should be 5% or 20%, Coyle refused the number.
His answer on sizing
So I would say alternatives are discretionary.
Jeff Coyle
If private markets earn similar returns pre-tax and less after tax, there is no performance argument; if diversification value is limited, there is no diversification argument. What is left is purpose, and he treated purpose as legitimate:
Exposure to innovation, for a family that wants to be in early-stage venture
Impact investing, for one that wants to affect society or the environment
Estate planning, where an illiquid asset the investor does not control can be discounted by the IRS for a wealth transfer, because a stranger would not pay a full dollar for it. He immediately set against that the public alternative with a step-up in basis and no tax at all, which makes the comparison less clear than it looks
Enjoyment. One of his favorite clients invested in private equity because he liked talking to the managers and digging through the companies
What that client actually earned
He was basically getting public market outcomes, but that was fine with him.
Jeff Coyle
The host's worry was that this all gets complicated quickly. Coyle drew a distinction.
Complex is not the same as complicated
Yeah, But it's not complicated. It's a step-by-step process of thinking through it.
Jeff Coyle
10. Who It Actually Suits
Coyle's answer on suitability is about liquidity rather than net worth, though the two travel together.
Why people fail
A lot of people can fail because they lack liquidity.
Jeff Coyle
So the client he would consider is one with excess resources that can be locked away for a long time. Long, in his framing, is longer than one fund's life.
The minimum horizon
In a traditional private equity exposure, you want to have at least a 20-year time horizon in order to make these investments.
Jeff Coyle
The reason is that an investor ladders into a program. Fund A has a particular focus, biotech because it is hot now, then AI, then information technology, so diversification by security, by industry and by vintage year takes 20 years or more to build.
Evergreen funds are the industry's answer, offering liquidity and lower minimums. Coyle's objection is arithmetic: if the traditional structure already produces market-like returns, another layer of fees makes the outcome worse.
The trade evergreen makes
So while it makes it accessible, it makes it a lot less desirable.
Jeff Coyle
His advice to anyone who does commit is to commit enough that it matters and not so much that it hurts.
He also gave the polite refusal for a friend's private deal — a restaurant, a startup, a friend-of-a-friend opportunity.
What that deal actually is
You're buying one company. So it's not diversified, it's highly speculative, it's highly illiquid.
Jeff Coyle
The line he recommends is that the investment program cannot afford the lack of liquidity, which is why the family stays in public markets.
On direct real estate, his answer was the same in spirit.
Rental property is a second job
And so if you're buying real estate, be sure you want to be in that business because it is a business.
Jeff Coyle
Maintenance, occupancy, tenants, bill payment, vendors: the people who look good at it make it look easy, and it is a business either way. Going in with open eyes is the point, not avoiding it.
Asked how to answer the pitch that ordinary investors finally have access to what institutions had, Coyle named the demand rather than the product.
Why the pitch works
And one of the reasons is everybody thinks of it, as an exclusive access and exclusivity is inherently appealing to people.
Jeff Coyle
That leaves an advisor with a collision: an empirical review that is unflattering, against real demand from people who do not spend their days reading research. His framing of the choice was blunt.
The question he puts to advisors
So I would say it's a question, do you give people what they want, or do you help them to want what they need?
Jeff Coyle
11. Endowments Had Access
The endowment record is the evidence Coyle treats as decisive, because it removes the usual excuse.
Nobody had better access
And endowments have traditionally had the best access to alternatives of anybody.
Jeff Coyle
They are first money into the private equity funds of choice because their capital is stable and consistent, and about half of a typical endowment sits in some form of alternative. Yale and Stanford were early venture investors and still reach what he called the top-tier firms.
What the study shows anyway
So if you were to look at the trailing 25-year performance of these endowments through the NACUBO study, and compare it to a public market equivalent, the endowments actually underperformed by a little bit more than 1% a year from that public market equivalent.
Jeff Coyle
And that is before tax, he noted, which endowments do not pay and private investors do. The host observed that the data is public because of the filings endowments make, and put the shortfall down to fees; Coyle agreed that is exactly what is happening.
The one genuinely interesting counter-argument is that top-quartile private equity returns are substantially higher than the average, so access to the top quartile would change the answer. That depends on persistence, and persistence is where he is most careful. Using venture as the example, prior winners do persist — but a fund lives 10 to 12 years, and Fund II comes to market a couple of years after Fund I, when only the investment period has happened and most of it is still carried at appraisal or fair value.
Persistence exists, and you cannot use it
And so there is persistence if you looked in the rear view mirror, but there's not persistence at the time you're actually committing capital, so it's not useful to you.
Jeff Coyle
12. Alternatives in a 401(k)
The host's concern was that the managers a top endowment reaches are not the managers a 401(k) participant will reach. Coyle went further and dismissed the framing rather than confirming it. The pool of capital the venture market absorbs is limited, so most people cannot get to the firms in question — and it does not much matter, because the future top-tier firms cannot be identified in advance anyway.
What he objects to is the vehicle.
His view of the destination
And I would argue that that's probably a terrible place for alternatives to be
Jeff Coyle
Bonus Insights
Coyle's summary of the whole framework is a sequence of questions rather than a verdict. First, where is the return coming from. Then four things to evaluate: has the category actually delivered through time, does it add diversification value, is there a non-investment purpose, and does it add value to the client and to the advisory business.
He was also careful to say that Libretto is agnostic about which investments an advisor uses. The reason he has opinions on alternatives is that they were a critical part of managing very affluent families for 30 years, so he spent an enormous amount of time on the empirical research.
The exchange the host valued most was about judgment rather than data. When Coyle shares the empirical work with clients, he said, almost nobody replies that they had always thought that. Investors are looking for counsel, and supplying judgment is where the value is created — which is the same reason he thinks demystifying alternatives beats selling them.
The last word Coyle gave was on the benchmark that decides all of it.
The public market is the base case
If I can get a better, more confident result in the public markets and maintain full liquidity, then it's a better solution.
Jeff Coyle
Coyle's bottom line is that alternatives are a discretionary allocation rather than a necessary one. On performance and diversification the answer is probably no. The exceptions are the genuinely different risks, meaning insurance payoffs, contractual cash flows and athlete earnings, plus whatever purpose a family has that a portfolio cannot supply.
Products, Companies & Tools Mentioned
Libretto (Coyle's company, built out of his own advisory practice to hold total-wealth planning, asset allocation and risk management in one place; it also runs professional development sessions on demystifying alternatives)
Dimensional Fund Advisors (Where the Hendrix and Medhat research on the performance of alternatives was done)
NACUBO (Its study of US endowment results is the 25-year record Coyle uses to test whether alternatives deliver)
Books & Resources Mentioned
The Hendrix and Medhat paper on alternative investments (Dimensional research Coyle cites for the finding that private equity's risk-adjusted returns match or slightly trail public markets)
The NACUBO endowment study (Actual results of US endowments over 25 years, roughly half of which sit in alternatives)
Stay Calm – David Booth (Recommended at the end of the episode; Booth is Dimensional's founder and chairman)
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