I think, in terms simply of a demo reel, you have the advantage of not being locked in to framerate or performance, so you can go above and beyond what someone is doing in a studio with added detail. Maybe in a production setting you’d need to cut out that additional material detail, or get rid of the multiple clouds of dust in front of your effect, whereas you could leave that for your demo scene. Also, non AAA studios may have more creative freedom and their game idea is outside the box. This could mean your effects may do something or connect with the game design in a way that hasn’t been seen or done before, and that new idea may give you a leg up on the person who’s just been doing “standard” high quality realistic effects (explosions, water, etc.)
I also think you have the advantage of learning from the artists at these AAA studios. A good example is Guerrilla Game’s publications, specifically their real time volumetric cloudscapes. For the sake of my point, lets say you study that publication and it takes you a month to recreate their final product yourself. It may have taken those guys 2, 3, even 4 months to get that final result. On top of that you may learn of a way to improve on it while you were working and come up with something better, or more efficient. Comparatively after your one month of work, you have another 2-3 months to learn something new after reproducing their cloudscape technique. So in terms of demo reel quality, I think you could match what is coming out of AAA games.
Now, since these AAA gals and guys are getting paid to do this, while you are trying to match them in your spare time, I think I agree with your friend that they have a time advantage over someone who hasn’t worked in that environment.
Competing with them for a job, I think they’d have an advantage. Working in those strict environments while still producing that high quality of work would lend them a lot of problem solving experience that would be attractive in a hire. Not only did that explosion/magic effect look awesome, but they got it running at 60 fps with 20 players on screen in a fully lit environment with other effects going off. They probably picked up some great tricks along the road to getting it running at framerate. AAA studios I’m guessing have a different work environment than a small or medium indie studio, and someone who’s already worked in that setting and can hit the ground running.
I think it’d also be hard to compete against someone who’s been nominated or won awards for their effects.
My personal, and very limited experience, would have me leaning 70/30 to the AAA person, unless your portfolio has something that goes outside the box that no one has seen before.