If you’re a wealthy investor, there’s a good chance you’ve been pitched a sophisticated investment product at some point — private equity, hedge funds, private credit. The sales pitch is appealing: exclusive access, higher returns, the kind of opportunity ordinary investors don’t get. But do these products actually deliver? A video on the Bloomsbury Wealth YouTube Channel.
Connect with us:
X (formaly Twitter)
LinkedIn
Facebook
YouTube
Transcript: Robin Powell & Ben Felix/ Portfolio manager & podcaster
Robin Powell: If you’re a wealthy investor, there’s a good chance you’ve been pitched a sophisticated investment product at some point — private equity, hedge funds, private credit. The sales pitch is appealing: exclusive access, higher returns, the kind of opportunity ordinary investors don’t get. But do these products actually deliver? Portfolio manager and podcaster Ben Felix says the assumption behind them is flawed from the start.
Ben Felix: You know, this is something that Warren Buffett has talked about in some of his past shareholder letters. And I agree with what he says, which is basically that people who are wealthy, people who are affluent, are used to being able to get better stuff. And there’s a tendency to believe that because they’re wealthy, because they have access in other areas of life, that their access and connections are going to help them in financial markets. But the outcome does not tend to be that they actually get better stuff. Financial markets are this rare endeavor, this rare field where trying harder, paying more actually makes you worse off rather than better. Doing less and paying less tends to put you in a better position. And so it’s very counterintuitive and I think for someone who is used to being able to exert their money or their connections in order to get better outcomes or better services, it’s very counterintuitive to hear that, well, actually that doesn’t work when you show up in financial markets.
RP: Take private equity as an example. It’s one of the most heavily marketed asset classes for wealthier investors. But has it actually outperformed public markets? The answer is far less clear-cut than the industry would have you believe.
BF: If you ask the question, has private equity outperformed public equity? That’s not an obvious question to answer, and you can find academic papers saying no, and you can find academic papers saying yes. And it really depends on what performance measure you use, how you’re benchmarking, and all kinds of other stuff. How you’re adjusting the benchmark to match the riskiness of the private assets. So it’s not easy, but I think that alone, and Eugene Fama talked about this years ago when we had him on our podcast. We don’t really know what the net-of-fee expected return on private equity is. And that alone should be enough to be a deterrent.
RP: That’s right, the Nobel Prize winner Eugene Fama, widely regarded as the father of modern financial economics, is a longstanding private equity sceptic. Similar concerns apply to private credit, another asset class that has been aggressively marketed in recent years. In both cases, there’s a deeper problem. The hedge fund manager and financial commentator Cliff Asness has a memorable name for it.
BF: In both cases, the other issue is what Cliff Asness has famously called volatility laundering where these things look really smooth. They look like they’re not changing in value very much from day to day, which can make them look very attractive in a portfolio optimizer because they’ll have a very low standard deviation of returns. But that’s because of illiquidity, not because of the fundamentals of the underlying assets, which in many cases are riskier than public market investments. And the way that that has now shown up. It took a while, but the way that it has now shown up is, okay, you did get less volatility, great, but now you don’t get liquidity. And that’s kind of the trade off that a lot of private market investors, I don’t think, realize that they were making, and we’re now seeing the implications of that.
RP: The appeal of exclusive, sophisticated-sounding investments is understandable. But the evidence suggests that, for most investors, simple, low-cost, transparent funds are a far better option. If you’re being offered a complex product, an independent financial adviser can help you look past the sales pitch and focus on what’s most likely to work in your favour.
Disclaimer — The information in this video does not constitute advice or a recommendation, and you should not make any investment decisions on the basis of it. If you do however require advice please do not hesitate to contact Bloomsbury Wealth.
