Very large portfolios—like university endowments, which range in the billions of dollars—find it difficult to secure above-average investment returns in the arena of publicly traded companies.

Because they are so large, to rely solely on these securities would create a de facto index fund.

That wouldn't necessarily impress the university trustees. More importantly, it wouldn't be prudent management.

When a portfolio manager has portfolios in excess of nine digits, the range of investment opportunities increases dramatically.

In particular, they have enough capital to negotiate customized deals in the private markets.

In other words, they don't have to buy real estate investment trusts: they could purchase specific real estate properties. These customized deals, in return, can yield—and have yielded—impressive returns.

To be fair, Swensen wasn't the first to discover this.

Warren Buffet executed these types of private transactions since the very beginning of Berkshire Hathaway.

Once a portfolio manager achieves a certain critical mass in funds, private deals are the norm, not the exception. Hedge funds rose in popularity in part because their managers weren't limited to buying and selling on the open market.

It wasn't long, then, that Alts became classified as just another investment class on the big asset allocation pie chart in the sky.

Alts seemed to exhibit non-correlated behavior (which failed famously in the credit crisis of 2008-2009). Indeed, The Economist ("Yale may not have the key," March 10, 2011), cited the illiquidity of Alts as their Achilles' Heel.

History notwithstanding, the non-correlation story seems to have stuck, and people haven't easily forgotten the outsized returns (despite poor performance during the 2008-2009 financial catastrophe, at the time of The Economist article, the private-equity portion of the Yale portfolio had still managed to earn an average of 30.4 percent per year).

With this kind of back story, why would the financial industry heed Swensen's warning to the masses against trying to replicate his deeds?

The movement to create Alt products benefited from the inevitable market bounce back.

The sweetness of this (albeit) short-term track record has hidden the true risks of introducing Alt products to the 401(k) market.

It now appears are though everyone and his brother wants to find the pot of gold at the end of the Alt rainbow.

Remember, though, the dangers of illiquidity.

We saw this in 2008 in 401(k) plans in perhaps the original Alt product, the Stable Value Fund.

Built on the backs of Guaranteed Insurance Contracts, the credit calamity of five years ago nearly brought down the house on several GIC funds. I (not so fondly) recall searching deep into the family tree of the underlying assets of client stable value funds to make sure they weren't exposed to the most vulnerable companies.

It wasn't a fun time, especially since many folks put their retirement assets into these vehicles precisely because they thought stable value funds were safe (why else call their value stable?).

The theory of Alts, at least at it applies to university endowments, is that university endowments have an infinite time frame. This means some specific portion of their overall portfolio can withstand long periods of illiquidity.

The same cannot be said for retirement savers. The joyous supersized returns during market bulls can just as quickly be replaced by bare nothing with illiquidity during a severe market downturn.

And, unlike publicly traded securities, the "reversion to the mean" may take a lot longer.

The lesson is simple: Don't go chasing rainbows.