Yup, as the FT reports here, the folk at Man Group and AQR are developing quant funds to track the returns of private equity. How does one invest quantitatively in private companies? You don’t. The private equity quant funds will seek to replicate the returns of private equity in the public markets. It turns out that buying highly leveraged small-cap value stocks has a return profile similar to the returns of the private equity asset class (see research here for example).
One has to applaud the quants for lifting the veil on many Private equity managers sole competitive advantage (that’s leverage if you didn’t follow), but just because it can be done, doesn’t mean it should be done. A portfolio loaded with companies with bad balance sheets may have earned more, but there is a lot of recognized and unrecognized risk in such a strategy.
Both companies are trying to develop strategies that will also allow investors to exit the investments more easily than is the case with PE, and are deploying different quantitative approaches.
The era of near record-low interest rates since the financial crisis has driven a boom in PE, helping persuade investors to lock up their money for an extended period. State Street’s PE index has gained 4.2 per cent this year and is up 75 per cent since 2013.
Man Group, which is headquartered in London and manages about $113bn, in April launched a “liquid private equity” fund in its Numeric division, according to people familiar with the matter. The fund will not invest in PE, but in publicly listed small and mid-cap US companies with return profiles similar to those found in a typical private equity portfolio.
Investors, who will be able to withdraw their money with a week’s notice, will be charged fees comparable to that of an actively managed mutual fund, so 0.5 per cent to 1 per cent. Man Group declined to comment.
Read more here.