I guess because you’re then doing active investing as you move away from the global market portfolio and taking higher risk.
Couldn’t you argue that you’re actually moving towards the “true” global market portfolio, which would include many non-publicly-traded assets? (Similar for real estate: seems plausible that people should overweight REITs in their portfolios.)
Seems to violate the efficient market hypothesis that there should be a free lunch here.
Couldn’t you argue that you’re actually moving towards the “true” global market portfolio, which would include many non-publicly-traded assets? (Similar for real estate: seems plausible that people should overweight REITs in their portfolios.)
Because the companies included in the private equity ETF are also already represented in the global market portfolio, the percentage of the market cap / total market cap is already includes what the market believes to be the discounted future profits of all non-publicly-traded assets that the private equity (e.g. Blackstone) invested in.
Not sure this is true if the risk is also higher.
Yes, beta (and risk) are higher and so alpha and the expected returns are higher, but that’s the trade-off so there’s no free lunch. It’s similar to foregoing bonds and only investing in stocks in one’s portfolio, but even riskier.
I think we’re talking past each other a bit. The claim isn’t that it’s directly valuable to overweight publicly traded private equity companies in one’s portfolio. Rather, the claim is that:
The true global portfolio contains much more private equity than the publicly traded market. This estimates that PE is about 3.6% of the global portfolio.
So ideally one’s portfolio (if you’re trying to mimic the global market portfolio) would be about 3.6% PE.
But just buying an equities index fund will underwight PE as an asset class because most PE isn’t public.
You can simulate the true global market portfolio by overweighting public PE if you think public PE should perform similarly to PE broadly.
Oh I see- thanks for clarifying! This is a very interesting idea, but somehow it still seems counterintuitive… by the same logic, wouldn’t you also want to overexpose yourself to e.g. publicly traded real estate because most of it isn’t public?
If true, and if most passive (institutional) investors aren’t sufficiently exposed to PE (or real estate), wouldn’t that suggest that the market undervalues this asset class and you can beat the market by investing in it? Honest question, I haven’t thought this through very well, but something still feels counterintuitive that you could create a better passive global market portfolio…
if you think public PE should perform similarly to PE broadly.
I think this might be another big if… though also one should be surprised if there’d be a big discontinuous jump in returns when going from non-traded to traded.
by the same logic, wouldn’t you also want to overexpose yourself to e.g. publicly traded real estate because most of it isn’t public?
Yes, I think that is true as well!
If true, and if most passive (institutional) investors aren’t sufficiently exposed to PE (or real estate), wouldn’t that suggest that the market undervalues this asset class and you can beat the market by investing in it?
Honest question, I haven’t thought this through very well, but something still feels counterintuitive that you could create a better passive global market portfolio...
Hm, very possible I am thinking about this wrong, but it’s pretty intuitive to me. After all, isn’t the “true” global market all investable assets, not just publicly traded assets? It’s the same reason why the Nasdaq Composite is a poor stand-in for the global stock market: for a variety of reasons, it only has a certain subset of publicly traded equities, and other baskets of equities have different risk-return profiles.
Couldn’t you argue that you’re actually moving towards the “true” global market portfolio, which would include many non-publicly-traded assets? (Similar for real estate: seems plausible that people should overweight REITs in their portfolios.)
Not sure this is true if the risk is also higher.
Because the companies included in the private equity ETF are also already represented in the global market portfolio, the percentage of the market cap / total market cap is already includes what the market believes to be the discounted future profits of all non-publicly-traded assets that the private equity (e.g. Blackstone) invested in.
Yes, beta (and risk) are higher and so alpha and the expected returns are higher, but that’s the trade-off so there’s no free lunch. It’s similar to foregoing bonds and only investing in stocks in one’s portfolio, but even riskier.
I think we’re talking past each other a bit. The claim isn’t that it’s directly valuable to overweight publicly traded private equity companies in one’s portfolio. Rather, the claim is that:
The true global portfolio contains much more private equity than the publicly traded market. This estimates that PE is about 3.6% of the global portfolio.
So ideally one’s portfolio (if you’re trying to mimic the global market portfolio) would be about 3.6% PE.
But just buying an equities index fund will underwight PE as an asset class because most PE isn’t public.
You can simulate the true global market portfolio by overweighting public PE if you think public PE should perform similarly to PE broadly.
Oh I see- thanks for clarifying! This is a very interesting idea, but somehow it still seems counterintuitive… by the same logic, wouldn’t you also want to overexpose yourself to e.g. publicly traded real estate because most of it isn’t public?
If true, and if most passive (institutional) investors aren’t sufficiently exposed to PE (or real estate), wouldn’t that suggest that the market undervalues this asset class and you can beat the market by investing in it? Honest question, I haven’t thought this through very well, but something still feels counterintuitive that you could create a better passive global market portfolio…
I think this might be another big if… though also one should be surprised if there’d be a big discontinuous jump in returns when going from non-traded to traded.
Yes, I think that is true as well!
This is what I was getting at by noting that PE should also be higher beta, so the risk-adjusted returns should not be higher!
Hm, very possible I am thinking about this wrong, but it’s pretty intuitive to me. After all, isn’t the “true” global market all investable assets, not just publicly traded assets? It’s the same reason why the Nasdaq Composite is a poor stand-in for the global stock market: for a variety of reasons, it only has a certain subset of publicly traded equities, and other baskets of equities have different risk-return profiles.