3 ms·
> the big returns investors think they are getting from private equity funds are really just the result of leverage and the bull market This suggests one way P
by dmurray 8y ago
> the big returns investors think they are getting from private equity funds are really just the result of leverage and the bull market
This suggests one way PE firms can beat passive indexing.
In bull markets, capital, and therefore leverage, is easier to obtain for niche or exotic investment firms (citation needed) and therefore for PE firms overall. And if they manage to get 10x leverage in bull years and 3x leverage in bear years, they end up comfortably beating the S&P even if they have zero or negative alpha.
I'm skipping over a bunch of details here, but doesn't this seem plausible?
- alexhutcheson 8y agoThis would require that changes in lending constraints precede the transition in the equity markets between bull and bear markets. The reverse seems much more likely: equity markets drop a lot, and banks/debt investors respond to that by tightening up their lending requirements.
- jmcqk6 8y agoThe big problem in that scenario is how to do you switch between the two?