Asset owners have dramatically increased their allocations to private markets over the past two decades, driven largely by a mistaken belief that private debt and equity deliver returns that are orders of magnitude above those of public markets. What makes most investors believe that private capital funds are such clear outperformers? In the first of his three-part series, Ludovic Phalippou, PhD, says the use of since-inception internal rate of return (IRR) and the media’s coverage are to blame.
This is the third in a three-part series from Edward McQuarrie that challenges the conventional wisdom that stocks always outperform bonds over the long term and that a negative correlation between bonds and stocks leads to effective diversification. In it, McQuarrie draws from his Financial Analysts Journal paper analyzing US stock and bond records dating back to 1792.
The relationship between capitalization rates (cap rates) and interest rates is more nuanced than first meets the eye. Understanding their interplay is a cornerstone of real estate investment analysis. In this blog post, Charles De Andrade, CAIA, and Soren Godbersen dissect historical data and discuss current and future opportunities.
Risk is not simply a matter of volatility. In his new video series, How to Think About Risk, Howard Marks delves into the intricacies of risk management and how investors should approach thinking about risk. He emphasizes the importance of understanding risk as the probability of loss and mastering the art of asymmetric risk-taking, where the potential upside outweighs the downside. With the help of our Artificial Intelligence (AI) tools, we summarized key lessons from Marks’s series to help investors sharpen their approach to risk.
Private equity portfolio companies are about 10 times as likely to go bankrupt as non-PE-owned companies. Granted, one out of five companies going bankrupt doesn’t portend certain failure, but it is a startling statistic. To understand what private equity is at its worst is a call to action, personally and professionally. We need to monitor the specific and repetitive activities that benefit the operators and no one else. Alvin Ho, PhD, CFA, and Janet Wong, CFA, share strategies gleaned from their fireside chat with Brendan Ballou and hosted by CFA Society Hong Kong.
Will the son of a billionaire perpetuate his inherited wealth? Apparently not, if history is any guide. In fact, there is strong evidence that most “rich families” will be poorer after several generations. Some of the reasons for this are systemic, but most factors that diminish a family’s wealth over generations are the choices that heirs make, writes Raphael Palone, CFA, CAIA, CFP.
Traditional investment approaches assume investors have equal access to market information and make rational, emotionless decisions. Behavioral finance challenges this by recognizing the role emotions play. But the ability to quantify and manage these emotions eludes many investors. They struggle to maintain their investment exposures through the ups and downs of market cycles. In this post, Stephen Campisi, CFA, introduces a holistic asset allocation process to manage the phenomenon of regret risk by considering each client’s willingness to maintain an investment strategy through market cycles.
Hedge funds have become an integral part of institutional portfolio management. They constitute some 7% of public pension assets and 18% of large endowment assets. But are hedge funds beneficial for most institutional investors? Richard M. Ennis, CFA, found that hedge funds have been alpha-negative and beta-light since the global financial crisis (GFC). Moreover, by allocating to a diversified pool of hedge funds, many institutions have been unwittingly reducing their equity holdings. He proposes a targeted approach that may justify a small allocation to hedge funds and cites new research that leaves the merit of hedge fund investing open to debate among scholars.
Robert Shiller’s cyclically adjusted price-to-earnings ratio (CAPE) is approaching historically high levels. In fact, CAPE’s current value has been exceeded only twice since 1900. But should you care? Investment professionals know that despite CAPE’s historical tendency to anticipate equity market returns, it isn’t a reliable market-timing tool. Marc Fandetti, CFA, shares evidence that CAPE changed in the 1990s and that mean-reversion concerns may be misplaced.
After World War II, the portfolios of US institutional investment plans began growing rapidly. As of 2021, the total assets held by US public and private pensions alone exceeded $30 trillion. Much like their predecessors in the mid-1900s, the trustees that oversee these assets have limited time and variable levels of expertise. This forces them to rely on the advice of staff and non-discretionary investment consultants. Mark J. Higgins, CFA, CFP, reveals an especially pernicious bias of investment consultants that is often masked by the inaccurate claim that their advice is conflict-free.
