Is Private Equity Diversifying?
Recent data from Preqin suggests that institutional investors are set to increase their allocations to Private Equity in the coming year, but many observers think that the large amount of dry powder waiting to be deployed represents a bubble in the industry. Regardless, it is considered by many investors as a diversifying allocation when compared to long only investments. We want to see if that is really the case and so this week we're looking at the top 5 private equity ETFs as listed by ETF.com:
Using returns for the last couple of years (from the beginning of 2018, to be precise), we can see that there is considerable clustering in returns, and that the ETFs are struggling to keep up with both the S&P 500 and S&P Listed Private Equity indices (the dashed lines on the chart).
At the same time the correlations to the S&P indices are pretty high, and that makes the diversifying effect relative to the equities somewhat questionable.
We also notice quite different volatility levels ranging from 13% to 27% annualized, and considerably lower risk-adjusted measures such as Sharpe and Sortino measures vs the S&P indices.
Of course, these are easily accessible products based largely on publicly listed companies, and there are many more private equity vehicles that are harder to get into and have better performance. However, those vehicles often impose additional limitations such as considerable lock up times. The overall impression from the “liquid” part of private equity funds, however, leaves something to be desired, both from performance and diversification points of view.
We will be keeping an eye on the space and also take a look at the less liquid funds in the Private Equity space in one of our future posts, so stay tuned!
Dmitri Alexeev is Co-Founder of AlphaBot
© The Sortino Group Ltd
All Rights Reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or scanning or otherwise, except under the terms of the Copyright, Designs and Patents Act 1988 or under the terms of a licence issued by the Copyright Licensing Agency or other Reprographic Rights Organisation, without the written permission of the publisher. For more information about reprints from AlphaWeek, click here.