The alternative fund graveyard: 75% have failed to last ten years
- Robin Powell
- Aug 22
- 5 min read
Three out of every four alternative mutual funds launched in the past decade are dead.
This isn't hyperbole. New research by Morningstar's Jeffrey Ptak reveals that of 1,345 alternative funds that existed on 1 January 2015, only 341 survive today. More than 1,000 have been liquidated or merged away — a mortality rate of 75%.
Yet while this investment graveyard fills with failed funds, regulators in both the US and UK are pushing to expand retail access to these complex strategies through new semi-liquid structures.
The death toll tells a stark story about what happens when marketing promises meet market reality.
The anatomy of failure
Ptak's analysis tracks alternative funds from 2006 onwards, categorising their fate with clinical precision. The pattern is clear: the more funds launched in any given year, the higher the eventual casualty rate.
The chart above reveals the devastating scope of alternative fund failure. 2014 marked the peak of alternative fund enthusiasm. Fund companies launched 302 new products that year, riding a wave of investor interest in "liquid alternatives" that promised hedge fund returns with mutual fund convenience. Of those 302 funds, just 54 remain active today.
The mortality timeline reveals how quickly these strategies unravelled. As Ptak notes: "From Jan. 1, 2009, through Dec. 31, 2014, investors poured $117 billion of assets into such funds. But in the years that followed, many investors headed for the hills in the wake of disappointing performance."
Most funds that died lasted between one and three years. Some lingered for five to 10 years before finally succumbing. Only a handful survived beyond a decade.
This wasn't death by market crash or black swan event. These funds died because they failed to deliver on their promises whilst charging premium fees for the privilege.
Why alternative funds proved so fragile
Alternative mutual funds emerged from a simple premise: if hedge funds could generate attractive risk-adjusted returns through sophisticated strategies, why not package those approaches in regulated mutual fund wrappers?
The theory was compelling. Strategies like long/short equity, market neutral approaches, and managed futures would provide portfolio diversification and smoother returns than traditional stock and bond allocations. Marketing materials spoke of "shock absorbers" and "diversifying harder" in an increasingly correlated world.
The execution proved far more difficult. Alternative strategies that worked for hedge funds with patient capital and sophisticated investors struggled when forced into daily-dealing mutual fund structures. Investors expected quick results and fled when performance lagged. Fund companies, facing asset outflows and rising costs, had little choice but to close underperforming funds.
The timing made matters worse. The alternative fund boom coincided with the peak of hedge fund performance. As these strategies became overcrowded and less effective, retail investors were paying high fees for watered-down versions of increasingly challenged approaches.
The semi-liquid solution
Fund companies have learned from this failure—but perhaps the wrong lesson. Rather than questioning whether alternative strategies suit retail investors, they've focused on solving the liquidity problem that killed so many funds.
Enter semi-liquid funds: interval funds, tender offer funds, and business development companies that lock up investor capital for months or years at a time. These structures prevent the investor flight that doomed their liquid predecessors.
The numbers suggest this approach is working — for fund companies, at least. According to Morningstar's June 2025 report The State of Semi-liquid Funds, assets in these vehicles have grown from $215 billion in 2022 to $350 billion by the end of 2024. Credit strategies now dominate, holding $188 billion and overtaking real estate as the largest category.
The report shows 27 new semi-liquid funds launched in 2024, with the pace accelerating in 2025. Interval funds have become the preferred structure because their tickers and predetermined redemption schedules make them operationally easier for brokerage platforms to handle.
But the fundamental question remains: if three-quarters of alternative mutual funds couldn't survive with daily liquidity, why should investors expect better results from strategies that lock up their money?
Three lessons from the alternative fund graveyard
Ptak draws three critical lessons from the alternative fund carnage that investors should heed before considering today's semi-liquid offerings.
First, ignore rhapsodic sales pitches. A decade ago, fund companies promised that alternative investments would revolutionise portfolio construction. Today's marketing uses similar language about "democratising access" to private markets and "unlocking" new opportunities. As Ptak observes: "The more rhapsodic the sales pitch, the more you should plug your ears." When promotional intensity peaks, strategy performance often follows the opposite trajectory.
Second, avoid areas with heavy launch activity. Fund companies tend to flood markets with new products just as underlying strategies reach peak popularity and profitability. "The more action there is in an area, the wider a berth you ought to give it," Ptak warns. The current rush to launch semi-liquid funds mirrors the 2014 alternative fund frenzy that preceded the great die-off.
Third, understand the true cost of illiquidity. Semi-liquid funds appear less volatile partly because they price holdings infrequently and lock up investor capital. This creates an illusion of stability that may mask underlying risks. As Ptak notes: "The more enticing the payoff, the deeper you ought to dig." When these investments disappoint — and some inevitably will — investors face a painful choice: wait out the lock-up period or sell other holdings to meet liquidity needs.
"The more enticing the payoff, the deeper you ought to dig." — Jeffrey Ptak, Morningstar
The regulatory push
The irony is that regulators are expanding access to these strategies just as the evidence of their unsuitability for retail investors mounts. In August 2025, President Trump signed an executive order directing agencies to facilitate alternative asset access in 401(k) plans, targeting the $12 trillion retirement market.
The UK has moved similarly, introducing Long-Term Asset Funds in 2021 and pushing for 10% pension allocations to private markets by 2030. 23 LTAFs have gained FCA approval, with major firms like Schroders, Aviva, and BlackRock entering the space.
Politicians frame this as levelling the playing field between retail and institutional investors. But the track record suggests institutions succeed with alternatives precisely because they have resources, expertise, and patience that retail investors typically lack.
The access paradox
Most semi-liquid funds remain difficult for ordinary investors to access directly. The three largest retail brokerage platforms — Charles Schwab, Fidelity, and Vanguard — don't offer interval funds to individual investors. Access remains primarily through financial advisers, with many funds restricted to qualified clients with more than $2.2 million in investable assets.
This limited access may be protecting investors more than hindering them. The complexity of these products, combined with fees that can run two to three times higher than traditional funds, makes them unsuitable for most retail portfolios.
State Street Global Advisors, with more than $180 billion in target-date assets, recently announced plans to offer target-date strategies with private market exposure. Others are likely to follow, potentially bringing semi-liquid allocations to millions of retirement savers who may not understand what they're buying.
Questions worth asking
Before considering any alternative investment, investors should ask whether they can afford a total loss without affecting their financial goals. Can they truly afford to lock up capital for years? Do they understand all fees and how they compound over time?
The alternative fund graveyard offers a sobering reminder that complexity rarely benefits the investor. When fund companies promise sophisticated strategies will solve portfolio problems, history suggests scepticism serves investors better than enthusiasm.
Three-quarters of alternative mutual funds are dead. The survivors haven't necessarily earned their place through superior performance — they may simply have benefited from better timing or marketing. As semi-liquid funds multiply, investors would do well to remember that the graveyard is always accepting new residents.
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