Robinhood ready to 'open the gates' on one-trade alts for its high-click investors, but Morningstar warns its 'move-fast-break-things' history could drive its new closed-end fund off the tracks

Trouble behind, trouble ahead, Robinhood CEO Vlad Tenev better watch his speed as he barrels ahead with a new semi-illiquid private fund offering. 

Morningstar sees a potential train wreck just down the tracks for investors who are notorious for loving the digital game of trading in liquid markets.     

“Robinhood is known for bold, innovative moves, but its new fund filing seems reckless,” writes Bryan Armour, Morningstar director of ETF and passive strategies research for North America, in a September research note.

Robinhood launched the free stock trading era, a gamified app, meme stocks and its latest foray, sports betting, all with great success – except for the $110 million in fines it's racked up in the past five years for misleading investors and sloppy security. See: Robinhood's sure 'RIA' play – custody and robo-advice – just got shakier as 'betting' ambitions go full bore.

Now, it's filing with the Securities and Exchange Commission (SEC) to sell a complex alts fund to its own cryptocurrency-enriched investors, and it's likely to be a big success, again. But that makes the sight-unseen product an even bigger problem, Morningstar asserts.

“Robinhood successfully promotes certain types of investing on their platform, so it could become big with their customers," says Armour, in an RIABiz interview.

Armour didn't elaborate on “certain trypes of investing,” but his firm gave a good indication of its concerns regarding Robinhood’s 25.2 million often-young and impulsive customers.

It “is a complex product aimed at a fast-trading audience, [creating] a risky mismatch, [since] Robinhood’s user-base has shown their trend-chasing attitude – not the patience, due diligence, and long-term discipline that a private equity strategy demands,” says a Morningstar spokesman.

Experience lacking

In an unusually sharp Sept. 16 research report, Morningstar said the fund could spell disaster for investors and waved a red flag about the company's move-fast-break-things past as an upstart trading platform.

"The firm is operating outside of the circle of competence … lacks money management experience and has never offered access to private markets in the U.S.," Armour writes. 

“Investors can already access private markets via better investment managers and in better vehicles. Investors should be cautious—Robinhood has a track record of winning at the expense of its customers,” wrote Armour. 

That said Robinhood's embrace of cryptocurrency means many of its investors got rich on such “alternative” investments. 

As of Dec. 31, last year, 7.7% or $38 billion of Robinhood's assets were cryptocurrencies. At the time, Bitcoin (BTC) was priced at $93,000. The BTC price now stands at $125,000, or a leap of more than 30%.

Investors are also seeing mostly upside in Robinhood's strategy. Its shares (HOOD) hit a new 52-week high of $153.83, today (Oct. 6), before settlng back to close at $144.26, off 2.97%, or $4.41. It hit a 52-week low of $22.72 in October a year ago. 

Breaking down barriers

Robinhood declined to comment, stating it is in a “strict quiet period.” It filed its Form N-2  with the SEC, Sept. 15., registering its new private equity fund, Robinhood Ventures Fund I.

In August, it launched a new alternative assets (alts) unit, Robinhood Ventures, and is still awaiting approval from federal regulators under the '40 Act.

Yet, Robinhood has already been promoting the move in a prospectus and a media release.

The fund will break down barriers, the company claims in its prospectus.

Alternative investments have traditionally only been open to investors who meet specific financial thresholds set by the SEC, including high net worth, high minimum investments and limited liquidity.

The prospectus argues that its new fund levels the playing field for retail investors.

“For decades, wealthy people and institutions have invested in private companies while retail investors have been unfairly locked out," says Tenev, in the linked release.

"With Robinhood Ventures, everyday people will be able to invest in opportunities once reserved for the elite.”

Robinhood also accepts its fund could post "substantial losses," and it uses the word “speculative” 28 times in its N-2 filing.

Risks, rewards

Robinhood's new fund will invest “long-term" in a concentrated portfolio of around five growth companies "at the frontiers" of industries, including defense, 'AI', robotics, and financial technology, according to SEC filings. 

The fund, which can borrow against one third of its assets to increase its leverage, will invest up to 20% of its assets in each of the five companies it selects, including through third-party funds, pooled investments, and special purpose vehicles.

The fund will weigh investments in crypto-currency, as well as more “vanilla” funds and stocks, including ETFs, mutual funds, and money market funds.

The move will open up investments to retail investors who traditionally have been limited to publicly listed companies. Those stocks are dwindlng –  down from 7,000 in the year 2000 to 4,000 last year, according to World Bank data.

As of Aug. 25, publicly traded companies, globally, had a market value estimated at $127 trillion. In contrast, the value of private companies surpassed $10 trillion in the first quarter of 2025, the company states.

Global alts are likely to surge 74%* in value to $29.2 trillion by 2029 from $16.8 trillion in 2023, according to Barron's. 

Fair warning

"Even as some of these private companies have become household names, exposure to them remains gated to the vast majority of retail investors," it adds.

“Private companies have traditionally created significant value for investors in private markets … The fund is designed to provide retail investors with exposure ... and a fee structure aligned with Robinhood’s mission to democratize finance.”

It has yet to clarify its fee structure, except for stating that asset- and performance-based fees levied by any alts funds it invests in will be passed onto retail investors.

Morningstar sees the invocation of ‘democratization’ as fair warning as much as a promise of goodwill.

“Another win for democratized access? I don’t think so,” says Armour.

Thoughtful stewards? 

“Investors have been told that Robinhood democratized finance ... In 2020, the SEC fined Robinhood $65 million for misleading customers about its revenue model, particularly selling customer orders to market makers for an “unusually high” fee … [which] resulted in worse execution prices,” Armour explains.

"In January 2025, the SEC again fined Robinhood $45 million to settle a range of charges, some of which related to inadequate protection of customer information.

"Robinhood has a track record of winning at the expense of its customers … [so] Investors should be cautious … [it's] another option for accessing private markets, but not one they should exercise.

“Investors can [also] access private assets using plenty of other options from reputable asset managers, so I disagree with their product positioning to begin with,” Armour continues, in an email exchange.

“Robinhood has no track record of managing money. Coupled with their history of regulatory issues, there is no indication they are going to be thoughtful stewards of investor capital, in Morningstar’s view,” adds a company spokesman, via email.

Structural issue

The fund’s closed-end structure presents another issue, according to Armour.

Unlike open-ended funds like ETFs, which issue new shares and run buybacks based on asset flows, closed-end funds IPO with a fixed number of shares, which can lead to internal pricing mismatches.

“Listed closed-end funds can result in bad outcomes for investors, who are forced to buy and sell at prevailing market prices instead of the value of the companies held,” Armour explains.

"There’s a reason why only five traditional closed-end funds have launched in the past couple of years and why 65% of existing listed closed-end funds were launched over 20 years ago," he adds.

“A heavy dose of caution is required for strategies like this, even when they come from well-respected asset managers, which Robinhood isn’t," he concludes.

Robinhood lacks experience as an asset manager, and its new alts unit, has no currently named experienced leader.

Rivals with bigger pockets

Robinhood could also fall foul of one of the biggest differences between public and private investments: It's a people business.

Many of the best investment opportunities are shared through personal connections, rather than worked out through data-driven analyses.

“It can be challenging to separate the wheat from the chaff in alternatives because investors are less familiar with those markets, strategies and fees are complex, and they tend to be less transparent than public strategies,” Armour explains.

Robinhood also notes that sourcing investments is a major source of risk for its new fund, although it says its “deep connectivity to the venture community” could aid it in sourcing deals.

It's "a highly competitive market ... Many of the fund’s potential competitors are substantially larger and have considerably greater [resources] ... better connections for deal flows, [and] access to funding sources that are not available to the fund," the prospectus reads. 

Worst case, the company likely won't do damage outside its own ecosystem, says Armour. 

“I wouldn’t expect much take-up outside of Robinhood.”

* Today, Robinhood runs a discount brokerage, a crypto exchange, crypto-trading, private equity, robo-advice, and RIA custody. It also offers select banking services, including credit cards, and debit cards.

* Data obtained in a Preqin forecast.