Why do LPs invest in HFs when PE is less volatile and better returns?
Makes no sense to me. PE has 15-20% IRRs, especially in software and tech (looks at Thoma or Vista), and HFs are down 40-50% esp those who have a ton of growth exposure. Why would any sane LP invest in the first over the second especially when PE also doesn’t have nearly as much volatility? Or just invest in VCs which haven’t seen nearly as much pain as stocks this year
Theoretically, HFs are supposed to exhibit low-to-zero correlation to the market, if they were genuinely "hedged" -- i.e. equal long and short exposure, and the remaining returns being exclusively alpha. You can't get that in private markets, mostly because you can't short.
Obviously in the bull market of years past many have strayed from that (and IMO those products have a less compelling value proposition compared to private markets), but many haven't, with years of underperformance relative to the tech indexers paying off hugely in this market (such as Bridgewater, Citadel, etc.).
You’re referencing one year as the reason for why institutions shouldn’t invest in HFs. MM HFs offer a market neutral, in theory alpha-only product that is uncorrelated. MM HF performance was good last year. As for SM HFs like tiger cubs, yes their product is largely levered tech beta, but it’s not like PE is much different. PE is literally levered small/mid cap value. Also VCs aren’t marked to market so they have larger drawdowns than reported. Same with PE. How does a TB/Vista sell some of the crap they bought 2020-2021 at ridiculous prices? They don’t. And if marked to market would have a drawdown larger than currently reported
Liquidity and M2M.
Like most things in life - diversification. Also to what others have said, the outperformance of PE is in large part on paper vs reality…
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