My understanding is that some assets claimed to have a significant illiquidity premium don’t really, including (as you mention) private equity and real estate, but some do, e.g. timber farms: on account of the asymmetric information, no one wants to buy it without prospecting it to see how the trees are coming along. Do you disagree that low-DR investors should disproportionately buy timber farms (at least if they’re rich enough to afford the transaction costs)?
Also, just to clarify my point about 100-year leases from Appendix E: I wasn’t recommending that low-DR investors actually do this! It was just supposed to be an illustration of why patient investors should be expected to own a larger fraction of the world over time.
I agree that, if an investment like a timber farm does earn a genuine illiquidity premium, then low-DR investors should like it more than high-DR investors. I calculated under “Theoretical illiquidity premium” that low-DR investors should invest a few extra percentage points in illiquid investments (the exact number depending on parameters). A few percentage points is not that big a difference, so I’d consider it a low-priority change.
I don’t know much about timber farms, I know I’ve heard a few people recommend it as a diversifier and that it’s not popular outside of very wealthy investors. Seems plausible that it could be a differentially good investment for low-DR philanthropists.
Thanks for the Giglio et al. reference, I’ll take a look at that.
Thanks for this!
My understanding is that some assets claimed to have a significant illiquidity premium don’t really, including (as you mention) private equity and real estate, but some do, e.g. timber farms: on account of the asymmetric information, no one wants to buy it without prospecting it to see how the trees are coming along. Do you disagree that low-DR investors should disproportionately buy timber farms (at least if they’re rich enough to afford the transaction costs)?
Also, just to clarify my point about 100-year leases from Appendix E: I wasn’t recommending that low-DR investors actually do this! It was just supposed to be an illustration of why patient investors should be expected to own a larger fraction of the world over time.
The numbers I cited on 100-year leases came from Giglio et al. (2015) (published version here https://academic.oup.com/qje/article/130/1/1/2337985 , accessible draft here http://piketty.pse.ens.fr/files/Giglioetal2013.pdf).
I agree that, if an investment like a timber farm does earn a genuine illiquidity premium, then low-DR investors should like it more than high-DR investors. I calculated under “Theoretical illiquidity premium” that low-DR investors should invest a few extra percentage points in illiquid investments (the exact number depending on parameters). A few percentage points is not that big a difference, so I’d consider it a low-priority change.
I don’t know much about timber farms, I know I’ve heard a few people recommend it as a diversifier and that it’s not popular outside of very wealthy investors. Seems plausible that it could be a differentially good investment for low-DR philanthropists.
Thanks for the Giglio et al. reference, I’ll take a look at that.