Matthew Klein quotes some interesting data that gets at the real reason why you can't make money investing in private equity funds, even though it's not quite true that nobody can "beat the market":
It so happens that Fidelity, the mutual-fund company, offers something that sounds quite similar to PE (buy smaller companies with lots of debt), but without the 2% management and 20% performance fees. The best part is that the 10-year returns of this product (15.8% annualised), which I am not endorsing in any way shape or form, are significantly higher than the 10-year returns generated by the PE industry on behalf of their limited partners after fees (13.7% annualised), according to Cambridge Associates. Intriguingly, the differential in performance is extremely close to what you would get if you took the numbers from Fidelity and subtracted out private equity fees.
The general issue here is that to make money as an investor in any kind of managed investment vehicle, you have to run the "efficient" markets hypothesis gauntlet twice. First, your investment manager needs to be able to systematically identify underpriced financial assets. That's hard. But the really bad problem for you is that the market for investment managers services needs to be systematically mispricing the value of the manager's skill! Otherwise, all the positive returns the manager generates are going to go into his pocket as fees. As long as investment management firms have some non-zero level of skill at sales and marketing, then returns after fees are going to be negative.
The old question, Where Are The Customers' Yachts? remains a good one, in other words.
I don't think we should ever rule out the possibility that there are some clever people out there devising investment strategies that are so daring and weird that their services actually do end up being underpriced. But once something becomes so well known as to be written into pension fund and endowment investment guidelines, those days are almost certainly over.
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