richard wrote:Valuethinker wrote:I suppose even a pure EMT person though, would concede that the evidence on PE funds is quite strong, so if you can presume privileged ability to pick PE funds (and to *reinvest* in the subsequent funds of the same partnership) that would be a form of 'skill'.
What evidence do you have? I don't believe that PE as a whole beats the market, certainly not on a risk adjusted basis. Some PE funds have done better than the market, most have not.
PE as a whole *with equivalent leverage* doesn't beat the SP500. Which given the fees that PE charges probably isn't too surprising (2 and 20 being a very deep hole to climb out of). I guess it would still have a diversification element (although I suspect statistical mirage: PE portfolios aren't marked to market, so their underlying volatility is likely closer to that of the SP500 than our data shows).
*but* the manager persistence effect is well known. The top quartile or so partnerships do, and successive partnerships run by the same managers do.
VC the situation is much more extreme. Almost all the excess performance of Venture Capital as an asset class over Nasdaq comes from the returns of about 10 partnerships in their successive funds.
Swensen talks about it in his book (not sure which one, possibly both) and if you look, eg at Josh Lerner's site at Harvard there are links to papers.
EMT 101 says you cannot beat the market.
Type I, Type II, Type III efficiency. Very few people think the market is Type III efficient: if you have non public information, you can beat the market.
The graduate level course says beating the market is a competitive industry in which some may succeed, as in any competitive industry.
The stuff I've seen says in mutual fund managers, they don't beat the market by enough to overcome the disadvantage of their fees. So there is manager skill, but not by enough.
However, the existence of market-beating skill does not really have any implications for you as an investor.
It does for Yale Endowment though
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GM was a skilled competitor and beat the market in car manufacturing for a while - look at it today.
I'm not sure the appropriateness of that analogy? GM is not a Private Equity firm. Berkshire Hathaway would be the closest analogy out there-- it does behave much like a PE firm.
The odds of you being able to beat the market consistently approximate the odds of you beating Tiger Woods at a game of golf - possible but I wouldn't bet my retirement on it.
I think you started out by saying that Swensen had privileged access to Yale alumni who were in private equity, and that is why he outperforms in fund selection in that asset class?
Then you seemed to be saying that that it is actually random luck, he was just lucky in his choices of PE funds? And in his asset allocation in general? And that is why he turned down higher paid jobs, because he knew he was just lucky?
ie Yale's Endowment's success is simply the result of a coin toss. Some endowment had to be lucky, and it happened to be Yale.
It's a view
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