Investment general discussion thread

In My Humble Opinion
1583

It would be difficult but interesting to compare our advisor’s outcome to a simple S&P index fund. When we became highish net worth, I sort of assumed that we needed an advisor, and I definitely knew I didn’t trust myself to manage the money. That being said, when we interviewed with them we got a sales pitch that included alternate investments only available to high worth investors through brokerages, and that really hasn’t come to pass. Not that I want to be investing in derivatives or the like anyway.

Funnily, we got headhunted by another investment firm (through our accountant) and they were fairly insane. They proposed selling our ENTIRE portfolio and moving the money into their investments. Oh, sure, let’s take a successful portfolio and give it a 15% haircut and then reinvest wholesale.

1584

I suspect that private equity opportunities was what they were thinking of selling you.

The industry sells them as delivering better than market returns and low volatility. And traditionally you needed to qualify as high net worth to buy in. Pretty sure they are great deal for the mangers of the firms selling them and very skeptical that their returns after expenses are any better than the index and that is before issues of excess concentration in one thing, illiquidity, and lack of transparency. But the idea of getting on what is only available to the special exclusive club! Must be good stuff!

1585

Is “private equity” the same thing as hedge funds? Because I remember hedge funds were only for high net-worth individuals and offering ridiculously good returns, though I think the managers took something like twenty percent off the top.

Private equity lately seems to be the villain behind many failed corporations.

1586

No.

Private equity buys usually controlling shares of private companies and try to increase their worth over a five year or so period. Hedge funds typically operate in the public space, don’t take control, and are relatively in and out.

Both have high fees to their managers.

1587

And even if they outperform an index/the market , (after fees) they might generate 1% more of profitability by having you accept e.g. 3% more risk.

The fact that the risk did not come to effect (materialize) doesn’t mean you were not exposed to it.

For that very reason, most of the “us vs. the market” charts are BS as they show YING but not YANG

1588

Do you (or anyone) know what it means for a financial advisor to provide access to purchasing a private equity fund?

Is the PE fund already up and running or is this part of the buy-in to the limited partnership?

If the PE fund is already running, is the PE firm selling the fund? Or is it one of the institutional investors reselling some of what they own?

Just curious TBH. I read the PE fund Wikipedia page and I understand the roles of the PE firm and institutional investors, but I’m not clear of the role of an individual with access to the fund.

1589

FYI - there are no capital gains/loss in a tax-deferred IRA - everything that comes out of it is treated as ordinary income (save for any after-tax contributions, of which the gain over principal is taxed as ordinary income).

Any tax harvesting of retirement instruments like a 401k, IRA or Roth would be balancing distributions between taxed and untaxed accounts to avoid higher brackets.

1590

I do not. I do know that they opening up to more general investors in the 401Ks but what the structures are? I look forward to reading what someone who knows can tell us!

1591

I’ve worked directly for some PE funds over the years, and to be clear I was never an investor in those funds. I am not anywhere near wealthy enough, but reporting to the board, which was made up of investors in the fund, I learned a few things.

Generally, the fund is, well, funded by a group of wealthy people or institutions that put their money in the fund, and have proportional ownership. If you’re up in that rarefied air, people running the funds will seek you out, or you’ll be friends with people who will invite you in. The last one I worked for, most of the owners were billionaires who’d been friends for a long time, along with some institutional money. Interestingly, up there when you buy in you do get a chance to negotiate certain things, like exit terms. I watched as one investor exercised his right to get out after a certain time, forcing a recap when it was not, shall we say, an ideal time. The rest of the billionaires were not happy.

As I understand it- and I’m open to being corrected- what’s happening now is that these funds are issuing shares that can be publicly traded. So instead of the fund having (say) 100 shares, split among ten rich people, with each share worth $10 million, now there are ten million shares each worth $100 that people like you and I can buy.

I assume that if the fund is closed or wound down (typically a good thing, as it’s when the investors get all their money) that pays out as a dividend? Now that I’m thinking about it, there are a lot of really interesting questions. For example:

I worked at one where I was tasked with disposing of an asset. I did so, and that resulted in a several million dollar pile of cash. That cash was paid out to the owners of the fund as a one-time special dividend. Of course, that happened because the board decided that’s what they would do with the money. They could have done something else with it, like reinvest it in the fund.

So presumably if that happens, it would be divided among all the small shareholders? It’s also interesting because would the board do that if, instead of each of the small number of investors getting a million dollar check, it’s now thousands of people getting a $34 check?

Personally, having seen how the sausage is made, and how they routinely screwed each other over, I wouldn’t touch PE with your money.

1592

Thanks, that’s really interesting @OldOlds . Seems like it would be easy to have different classes of stock to separate out the chumps.

1593

Oh, they do. At least, in the classic incarnation. Last one I was at we had three classes, Billionaire, High-level fund employees, and managers of the companies. I had an opportunity to buy in as the last one and said “no thank you.”

And my friends who are still there, four years later, still haven’t got a payday. They haven’t lost their money, but it’s just never the right time to recap and pay them out.

But this is one of the things that concerns me about opening these up to regular investors: I guarantee that if they legally can, the principals will make sure they are more equal than the others.

1594

Multi-level share issues are not a new idea. But this sure does sound like a carefully calibrated way to rope in the wanna-be sophisticates from the VHNW & demi-UHNW crowd.

Speaking deliberately very politely … in light of the current regulatory confusion in Washington, I would be far more circumspect about novel investment vehicles today than I would have been 4 or 12 years ago.

1595

Yes, I know that. Which is what DSeid said and with which I agreed.

Not sure I understand what you mean. Can you explain further, please?

1596

Of course you’re right, but they’ll do things like waterfalls, which is where one pool needs to fill with money to a certain level before the next pool down starts to fill. So the people with the good shares get paid first, and then the next level gets what’s left, and so-on down the line.

Again, in a just world, the SEC would be making sure that doesn’t happen with funds open to the public, but:

Yeah, that.

Frankly, someone like you or I has no business in a semi-adversarial investment relationship with someone whose garage got a writeup in Architectural Digest (as was the case for one of my bosses).

FWIW, I was a VP-level at a pharmaceutical company owned by one of the funds, doing Business Development, which is why I would sometimes interact with the board. Prior to that I was a Program Director running a drug development program at a different pharma co that was purchased by a different PE shop.

The upside is that I have several billionaire contacts who would take my calls. The downside is there’s no point because I am absolutely confident that not one of them would lift a finger to help me.

Sorry, PE taught me some ugly lessons, despite actually really enjoying both the jobs mentioned above.

1597

Ho-hum. Another record high today for the S&P 500.

On a totally-unrelated note, does anybody here have a opinion on annuities? Specifically, a 3-, 4-, or 5-year fixed annuity offered by insurance companies?

1598

do you mean immediate guaranteed annuities (i.e. multi year guaranteed annuities MYGA)? They’re fine. Function and return are very close to a similar duration CD. Watch out for surrender charges if you need your money earlier and early withdrawal penalties if you are under 59.5. Also they have insurance company risks, so you will want to only buy from a financially strong company.

1599

Broadly, both operate subject to the same kinds of exemption from registration under the Federal securities laws, and their managers rely on the same kinds of exemptions, so legally, they are both what are broadly called “private funds.” Under the exemptions, they are generally only offered to “accredited investors” with over $1 million in net assets excluding their house, or income over $200k per year. These numbers are not adjusted for inflation and they used to mean a lot more than they do now. Many private funds have minimum investments of over $1 million, so just being an accredited investor doesn’t guarantee you access.

Hedge funds and private equity funds differ significantly in their preferred investments and they can have very different ways of operating for investors.

Today, “hedge funds” invest in basically anything but generally things with a clear, public market price. Classically, a hedge fund was a fund that invested in a paired portfolio of long positions and short positions such that the portfolio was “hedged” against market risk - you were investing in the skill of the manager. The idea was that the portfolio would not move with the market and would reduce the risk of your portfolio while generating consistent returns. Generally, these funds weren’t correlated with the market and could lower the volatility of a portfolio. They did this by, on average, generating consistent losses. Each individual fund tried to stand out by taking wildly non-diversified risks. Sometimes that panned out in the short term and the fund grew. Other times, the fund cratered and disappeared altogether. Then the managers would start a new fund and try again. You can see that this wasn’t a sustainable business model, so most “hedge funds” operate nothing like this today. A subset of hedge funds called “delta neutral hedge funds” sometimes but not always still use this strategy. The reason the funds need a clear market price is because they will let people buy into or sell out of the fund regularly, and the clear market price lets them fairly value the portfolio at each purchase or redemption.

Private equity funds invest in significant stakes in companies that are not publicly traded. They may buy a public company and take it private, or they may find a private company and invest in a purely private transaction. These can be anything from small ventures that the fund hopes to grow rapidly (the tiniest company investors are “angel funds,” the next step up is “venture capital funds”), companies that are flailing but have real business potential (“turnaround funds”), or companies that are failing but whose assets are worth more than their book value (“restructuring funds”). The last two are strategies almost always used together by the same managers. The seller of the company always says they are selling to someone with a turnaround plan and maybe sometimes the buyer even believes that for a while but turnarounds often turn into restructuring or liquidation. This is where private equity gets a bad name. There are plenty of strategies for the manager to make money from a failed turnaround, and even for the investors in the fund to make money, but creditors are usually shafted and workers always are. The fund are all generally aiming to make money through a “liquidity event”: going public, selling to a larger company, occasionally selling to employees (which often doesn’t work out for employees because the company has been saddled with debt), special one-time massive dividend (that leaves the company financially weakened and often heavily indebted), or sale of all/most of the assets (liquidation).

Because private equity investments aren’t liquid and don’t have public market values, they don’t provide regular liquidity to investors. Generally, investors agree to lock up their funds for a minimum of five years. They usually don’t pay all the money up front, but rather they agree to meet certain ongoing capital commitments over time as the fund locates investments. They also only get distributions as the fund’s portfolio companies have their liquidity events.

1600

Some funds are willing to let a single advisor invest a pool of money for their clients. Generally, these are done through a special purpose vehicle managed by the adviser which counts as a only a single investor for the private fund. You still need to be an accredited investor to invest in the SPV, but if you only have $100,000 to invest and want to get into a fund that has a $10 million minimum, this is one way to get it. The adviser/SPV will have its own fees, so it will definitely cut into the performance of the fund.

PE funds generally are started fresh with capital commitments made up front and invested over time. But (1) the managers have a long history of this so what you are buying is a manager’s track record with similar fundss, and (2) there are lots of exceptions, like when a contemplated investment is too large for an existing fund by itself, so the fund starts a co-investment fund to invest in the single big company. In a sense, that’s investing in just a single investment of an ongoing private equity fund. And (3) sometimes funds will just raise additional funds but this is tricky because everyone (new and old investors alike) effectively have to agree on the value of the portfolio).

1601

Apparently neither of these are still as true. There are funds, and even ETFs, that are open to more of the “retail” crowd, and they have some, albeit limited and controlled, liquidity.

https://www.morningstar.com/business/insights/blog/state-of-semiliquid-funds?utm_term=converging+markets&gclid=EAIaIQobChMI5dvw0viklAMVe5vCCB0NNjczEAAYASAAEgIzdfD_BwE&utm_campaign=wds_variant&utm_medium=cpc&utm_content=engine:google|campaignid:22334207517|adid:743937232073&utm_source=google

Semiliquid funds are the most popular way for investors to access private markets.

They’re pooled investment vehicles that typically only allow redemptions at specific intervals, which sets them apart from traditional funds that allow investors to redeem their investments at any time. These funds may also impose restrictions on the amount that can be withdrawn during each period.

Semiliquid funds are commonly used to provide access to alternative investments, such as private equity, real estate, or credit strategies, where the underlying assets are not easily traded. They aim to balance the need for investor access to their money with the long-term nature of the investments they hold. …

… As of April 2026, SEC regulations allow semiliquid funds that own more than 15% in private funds to be available to anyone, whereas previous rules limited the availability of semiliquid funds to accredited investors. Still, investors must meet at least one eligibility requirement at the relevant tier. These requirements are shown on the table below. …

Also apparently called “Evergreen Funds” and available through financial advisors.

No thank you.

1602

I doubt it’s a good thing that ordinary people will be able to invest their retirement money in private equity or cryptocurrencies.