Larry Swedroe: Private Credit Performance

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Random Walker
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Larry Swedroe: Private Credit Performance

Post by Random Walker » Wed Nov 21, 2018 2:19 pm

https://www.etf.com/sections/index-inve ... nopaging=1

In this article Larry introduces another asset class, private credit, that will soon become investable through an interval fund. To my eye the risk adjusted returns look great but the correlation to equities looks high. In my mind the whole purpose of alternatives is to diversify away from the equity risk that dominates most all of our portfolios. Of course, with such modest volatility, even with positive correlation to equities, it can perform relatively well just when needed most in an equity bear.

Dave

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nedsaid
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Re: Larry Swedroe: Private Credit Performance

Post by nedsaid » Wed Nov 21, 2018 2:59 pm

The search for return uncorrelated to stocks continues, sort of like Ponce de Leon's search for the Fountain of Eternal Youth. We will see. How much is this different from investing in bank stocks?
A fool and his money are good for business.

scout1
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Re: Larry Swedroe: Private Credit Performance

Post by scout1 » Wed Nov 21, 2018 3:14 pm

I'm not yet convinced this is a new asset class. Isn't private debt just illiquid public debt? Once you can buy and sell it, then it seems the illiquidity (risk) premium goes away.

Also, are they using debt to buy more debt?

I don't love the fact that they cited a study done by two people at Adams Street Capital, which does private market investment management.

Given that the volatility is based on quarterly self reported valuations it's pretty hard to trust that risk statistic even if the authors did try to link it to public markets in a bit of a convoluted way.

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GreatOdinsRaven
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Re: Larry Swedroe: Private Credit Performance

Post by GreatOdinsRaven » Wed Nov 21, 2018 7:31 pm

What do they benchmark against?

*edit*
The Barclays High Yield Bond Index.
"The greatest enemies of the equity investor are expenses and emotions." -John C. Bogle, Little Book of Common Sense Investing. | | "Winter is coming." Lord Eddard Stark.

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GreatOdinsRaven
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Re: Larry Swedroe: Private Credit Performance

Post by GreatOdinsRaven » Wed Nov 21, 2018 7:52 pm

It will be interesting to watch how this product performs over the years- just like it’s been interesting to watch how managed futures (AQMIX), the AQR style premia product QSPIX/QSPRX, and the reinsurance product SRRIX have performed. So far LENDX has done well.

I encourage everyone to look at the charts of those tickers and form your own opinions about uncorrelated returns.

Rick Ferri is right, there’s beauty in simplicity...
"The greatest enemies of the equity investor are expenses and emotions." -John C. Bogle, Little Book of Common Sense Investing. | | "Winter is coming." Lord Eddard Stark.

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Random Walker
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Re: Larry Swedroe: Private Credit Performance

Post by Random Walker » Wed Nov 21, 2018 10:09 pm

GreatOdinsRaven wrote:
Wed Nov 21, 2018 7:52 pm
It will be interesting to watch how this product performs over the years- just like it’s been interesting to watch how managed futures (AQMIX), the AQR style premia product QSPIX/QSPRX, and the reinsurance product SRRIX have performed. So far LENDX has done well.

I encourage everyone to look at the charts of those tickers and form your own opinions about uncorrelated returns.

Rick Ferri is right, there’s beauty in simplicity...
I think it’s a mistake to only look at past performance, especially over such short time period. It’s very important to be able to look forward and appreciate the rationale for a potential portfolio addition. Understanding the risk based or behavioral based reason behind an expected return and how the investment is expected to mix with other portfolio components will provide the investor with the conviction to stick to a plan. We can only invest looking forward.

Dave

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Re: Larry Swedroe: Private Credit Performance

Post by HEDGEFUNDIE » Wed Nov 21, 2018 10:12 pm

There is already an investable index for private credit: BDCS.

Returns have been similar to high yield corporate bonds but with much higher volatility.

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GreatOdinsRaven
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Re: Larry Swedroe: Private Credit Performance

Post by GreatOdinsRaven » Wed Nov 21, 2018 10:26 pm

Random Walker wrote:
Wed Nov 21, 2018 10:09 pm
GreatOdinsRaven wrote:
Wed Nov 21, 2018 7:52 pm
It will be interesting to watch how this product performs over the years- just like it’s been interesting to watch how managed futures (AQMIX), the AQR style premia product QSPIX/QSPRX, and the reinsurance product SRRIX have performed. So far LENDX has done well.

I encourage everyone to look at the charts of those tickers and form your own opinions about uncorrelated returns.

Rick Ferri is right, there’s beauty in simplicity...
I think it’s a mistake to only look at past performance, especially over such short time period. It’s very important to be able to look forward and appreciate the rationale for a potential portfolio addition. Understanding the risk based or behavioral based reason behind an expected return and how the investment is expected to mix with other portfolio components will provide the investor with the conviction to stick to a plan. We can only invest looking forward.

Dave
I stand by my assertion that everyone should look at the performance charts of all these products.

How have they held up over time? How much money have people lost using them? For example SRRIX, the reinsurance fund, those losses are permanent losses of capital and people are paying high expense ratios for the privilege. How much money are people going to throw into the seemingly bottomless pit of managed futures? QSPIX?
"The greatest enemies of the equity investor are expenses and emotions." -John C. Bogle, Little Book of Common Sense Investing. | | "Winter is coming." Lord Eddard Stark.

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