About 10 years ago, Steve Edmundson, the manager of the Nevada state pension, became a folk hero in the investment world when The Wall Street Journal profiled him in an article titled: “What Does Nevada’s $35 Billion Fund Manager Do All Day? Nothing.”

It was an exaggeration to say he did “nothing,” but Edmundson definitely did things differently. Since the 1980s, the trend among pension and endowment managers had been to follow in the footsteps of Yale University’s David Swensen. Swensen had achieved outstanding returns for Yale’s endowment by shifting into private funds, including venture capital, private equity and hedge funds. Edmundson bucked that trend, opting for a simple portfolio of index funds, and ended up achieving better results than his peers.

Despite the attention Edmunson received for his simple approach, private funds continue to be popular among institutional investors. According to data from the Boston College Center for Retirement Research, 65% of endowment assets are invested in private funds, as are 35% of public pension funds.

And today, there’s a growing push for individual investors to get into private funds. Firms including Morgan Stanley, Goldman Sachs, BlackRock and even Vanguard are rolling out new funds geared to individuals. In his annual letter this year, the CEO of BlackRock made this argument: “While private assets may carry greater risk, they also provide great benefits.”

I don’t find this argument convincing. Even for very high net worth investors, the downsides of private funds can outweigh the benefits. Five factors, in particular, stand out.

1. Performance. A key challenge with private funds is that they’re like private clubs. They have limited space, so they can’t accept everybody. As a result, universities and pension funds, which can write the largest checks, are typically first in line for the best funds. This relegates individuals—even very wealthy individuals—to the second tier and below.

In an interview a while back, one high-profile venture capitalist explained this dynamic: “[W]hy do I want an investor in my long-term capital fund who’s going to feel the urge to want to sell when the market goes down…If I’m in the fortunate position to be able to choose any investor I want, that’s the last investor I want. So the best investor, the one that is the most long-term oriented, is either a university endowment or a charitable foundation…”

This is a problem because research has found that a wide gap separates the best private funds from the worst, and that this gap is much wider than the corresponding gap among publicly-traded funds. As a result, the private funds available to individual investors may not deliver the returns they expect.

Meanwhile, the future performance of private funds—even the best funds—is starting to look more uncertain. According to a recent analysis by Moody’s Investors Service, private equity firms were facing a challenging environment even before this year’s market downturn. The chairman of Bain & Company, one of the most prominent firms in the field, recently commented, “We aren’t even in a recession now, and we’re already at a point where things are incredibly challenging.”

This may help explain the pattern in recent private fund performance. Over the past 25 years, private equity has, on average, outperformed standard market indexes like the S&P 500. But more recently, this edge has disappeared, and private funds have lagged in recent years.

2. Illiquidity. Back in 2008, when financial markets seized up, some universities found themselves boxed in by their private fund holdings. Most notably, Harvard made news when it was forced to sell a significant portion of its private equity holdings at a loss during the worst of the crisis.

Why did Harvard sell its holdings at such an inopportune time? This gets at another key difference between public and private funds. Withdrawals from private funds are tightly controlled. Some funds allow quarterly redemptions, while others allow redemptions only annually. During periods of stress, however, these funds have the right to suspend withdrawals altogether. This is known as gating.

This is the position Harvard found itself in. In that situation—when a private fund won’t offer a redemption—the only alternative is to try to sell the holding to another investor on the “secondary” market. Such sales aren’t guaranteed, though, and that can compound financial distress.

Ironically, Harvard seems to have made the same mistake twice. Facing a reduction in funding from the federal government this year, the university is reportedly trying to arrange another secondary sale, looking to offload up to $1 billion of its private fund portfolio. Yale too is working to unload some of its holdings.

Some of the newer funds being rolled out for individuals allow for more frequent withdrawals, which is helpful, but illiquidity is just one of the challenges posed by private funds.

3. Fees. If there’s anyone who knows the landscape of private funds and fund managers, it’s longtime Wall Street Journal reporter Gregory Zuckerman. He’s covered the world of hedge funds and private equity since the 1990s. So his reaction was notable when, back in March, it was announced that the Boston Celtics would be sold for more than $6 billion to a private equity executive named Bill Chisholm.

“Private equity is rolling in so much dough that a guy I’ve never heard of at a firm I’ve never heard of can afford to buy one of the most prestigious teams in sports,” Zuckerman wrote.

Private fund fees, in other words, are extraordinarily high. According to one recent study, fees can total as much as 4% per year. In contrast, index funds today cost as little as 0.03%, and some are even free.

4. Risk. Private fund enthusiasts argue that these funds carry lower risk than their publicly-traded counterparts. But the basis for this argument is shaky. Since private funds generally issue valuation updates infrequently—usually just quarterly—they exhibit less price volatility than public funds, where prices are updated every day. But this just makes private funds appear more stable. During periods of market stress—when it matters most—private fund valuations can become quite disconnected from reality. Critics have called out this practice as “volatility laundering,” but it continues.

Pricing, though, is just a symptom of a larger issue: that private funds are essentially black boxes. They aren’t subject to the same regulatory oversight as standard funds and offer much less transparency. While fraud can and does occur at public companies, it’s much more prevalent among private funds.

5. Taxes. A final challenge with private funds is that they tend to deliver unpredictable tax results, and often these results aren’t even known until many months after the year has ended. This makes tax planning for private fund investors an exercise in frustration.

Can you make money in a private fund? Probably. But I see it as an uphill—and unnecessary—battle.​