This paper investigates the institutional investor allocations to real assets, private equity and hedge funds. Institutional investors delegate 85 percent of the asset management of their alternative investments to external managers and fund-of-funds. Institutions relying on these nancial intermediaries underperform institutions investing internally (directly) in all three alternative asset classes. Fund size is the most important determinant of the degree of investor sophistication: larger funds pay lower fees, invest relatively more internally, and select better external managers. Larger funds experience diseconomies of scale when investing only in one alternative asset class, while smaller investors obtain better performance when specializing in one alternative asset class instead of simultaneously investing in real assets, private equity and hedge funds. On a net return basis, smaller institutional investors would have obtained at least 2 percentage points higher annual returns had they invested passively in public equities rather than alternative assets over the 1990-2011 time period.