Private asset risk
Previously we’ve discussed the artificially low risk estimates from private assets that are not marked to market. Academics have studied this and noted that the delay in revaluing assets and the smoothing effect of illiquidity both lead to underestimation of volatility. A group from MIT developed a desmoothing process to correct for this. The team at the firm TwoSigma have applied this approach to unlisted property, private equity, venture capital and buyout indices. They find that once you make this correction the volatility of the unlisted assets nearly doubles, and for PE and VC is almost the same as the listed investment proxies for those asset classes. Broadly speaking, the higher the autocorrelation of returns (i.e. the more that this month’s return is the same as last month’s), the higher the increase in volatility from desmoothing. That’s something to think about for those private debt funds whose NAVs look like a straight line going up.
More at Two Easy Steps to Take Your Private Assets Returns Public (twosigma.com). You can also read the original paper at http://web.mit.edu/Alo/www/Papers/JFE2004Pub.pdf (warning: it’s very technical).
Important Information: This document has been prepared by Aequitas Investment Partners ABN 92 644 165 266 (“Aequitas”, “our”, “we”), a Corporate Authorised Representative (no. 1284389) of C2 Financial Services, (Australian Financial Services Licensee no. 502171), and is for distribution within Australia to wholesale clients and financial advisers only.
This document is based on information available at the time of publishing, information which we believe is correct and any opinions, conclusions or forecasts are reasonably held or made as at the time of its compilation, but no warranty is made as to its accuracy, reliability or completeness. To the extent permitted by law, neither Aequitas nor any of its affiliates accept liability to any person for loss or damage arising from the use of the information herein.
Please note that past performance is not a reliable indicator of future performance.
General Advice Warning: This document has been prepared without taking into account your objectives, financial situation or needs, and therefore you should consider its appropriateness, having regard to your objectives, financial situation and needs. Before making any decision about whether to acquire a financial product, you should obtain and read the relevant Product Disclosure Statement (PDS) or Investor Directed Portfolio Service Guide (IDPS Guide) and consider talking to a financial adviser.
Taxation warning: Any taxation considerations are general and based on present taxation laws and may be subject to change. Aequitas is not a registered tax (financial) adviser under the Tax Agent Services Act 2009 and investors should seek tax advice from a registered tax agent or a registered tax (financial) adviser if they intend to rely on this information to satisfy the liabilities or obligations or claim entitlements that arise, or could arise, under a taxation law.