Allocating a significant portion of a portfolio to alternatives is not a hard sell for families, Orbach believes, although he says that a minority of them find some of the strategies daunting and the reporting and disclosure opaque.

Another consideration is that during crisis periods, investors who think they are diversified because they have multiple managers within a given asset class often learn a hard lesson. Orbach charted 42 crisis months from January 1980 to April 2007, and calculated the correlation of different asset-class indexes to each other. He found that during these periods, correlation of various investment styles within a given asset class increased, meaning they moved together, negating the principle of diversification. "The moral of the story," he says, "is that many traditional equity managers give an investor lots of styles, but little diversification."

Access Issues
For individual investors who are attracted to the alternative investment style, there are drawbacks worth noting, including lack of liquidity, high taxes and the most worrisome buzzword among families: access.

"The challenge with the goal of emulating Harvard and Yale can be summed up in that one word," says Charlotte Beyer, the founder of the Institute for Private Investors, a networking and educational resource for wealthy families and their advisors. Because of the size of the Harvard and Yale endowments—$26 billion and $18 billion, respectively—these institutions and their financial managers have the clout to access the most exclusive funds, a luxury that many individual and family investors do not have. However, the desire for such access is strong and growing. The institute conducted a recent survey of its members, concluding that 74 percent of respondents view alternative investments as risk-reduction tools.

More families also understand the complexity of alternatives, which are designed to negate the traditional stock market fluctuations and deliver better returns for the portfolio. The downside is that access to these alternatives may become still more restricted, even for the world’s very affluent population—those with more than $30 million in assets. According to the Merrill Lynch and Capgemini World Wealth Report 2007, the global population of the superrich grew by 11.3 percent from 2005 to 2006, with their total wealth jumping 16.8 percent. It is these investors who will most likely demand sophisticated alternative investments, and that in turn affects access.

According to Beyer, 10 years ago investors were given a "guide to the warehouse" with the advent of open architecture. Firms that adhere to this philosophy do not employ money managers in-house, opting instead to choose from the pool of outside managers. Beyer says the next transformation, in which "several aisles in the warehouse may be closed," has to do with lack of access to alternatives for individual investors, who will receive second-class treatment compared to the multibillion-dollar endowments.