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I think the central fallacy is that you're assuming more money makes it easier to achieve higher returns. For the vast majority of finance, you get diminishing
by dcolkitt 5y ago
I think the central fallacy is that you're assuming more money makes it easier to achieve higher returns. For the vast majority of finance, you get diminishing returns to scale. There are many investment strategies that have limited capacity, and as you get bigger you either have to dilute or take increasingly risky positions.
The phenomenon's pretty ubiquitous among hedge funds. Tons of funds produce stellar returns at $100 million AUM, then use that track record to grow to a $1 billion+ and all of a sudden put up mediocre results.
- xkjkls 5y agoMore untaxable money definitely makes it easier to achieve higher returns.
- jklein11 5y agoCan you explain how?
- boringg 5y agoYou simply have more investible dollars to use. Therefore any losses can be spread across a larger base, or, alternatively, you have potentially more gains available to you as a result of more exposure. It's similar to leverage.
- IG_Semmelweiss 5y agomore investments over a greater pool of assets, chasing returns, also increase your surface area of error. Examples abound. There's a reason its easy for funds to get big with a small LP commitment round, and there's also a reason most funds close after hitting certain numbers, increasing the AUM means increased complexity, and thus, potential implosion. The real world bears many examples of growing AUM portfolio that blew up past a certain size. There's no counterexample that I know of , of a fund with a consistent growth pattern that started small, hit size, and then increasing further their size with the same trajectory from having more investment dollars to use.
- boringg 5y agoAgreed - though the numbers in the Thiel Roth aren't at that level of scale. Therefore having more money to invest in the market allows for an advantage. From your statement I can't tell if you think that having more after tax money is a benefit or a drawback for Thiel's investments. Also at higher AUM VC you have the Softbanks (and now every major VC firm that needs to compete at that level or be left in the dust)
- xkjkls 5y agoTaxes drive a lot of investment strategies. A large number of strategies to increase returns are things like tax loss harvesting, because every sale forces a taxable event that is going to reduce your total capital base. Not being taxed obviates all of that and opens up a number of opportunities.
- boringg 5y agoI think you have two things confused. % vs total returns. Larger funds have a tougher time finding high returns. However if you are getting dollars on a lower cost basis (i.e. untaxed vs 0.8 taxed dollars) you have more money that can be exposed. Therefore allowing for more upside and alternatively any losses can be spread across a larger base. In no world does not having more money allow for more money to be gained. In venture it also means you have more money you can burn at a loss.