Man Numeric examines how private equity’s appeal rests on smoothed returns, perceived diversification, and an illiquidity premium that may be overstated. The authors dissect claims around diversification, drawdown protection, and low risk, showing how infrequent marking to market reshapes perceived volatility. They then test whether a liquid public equity portfolio can approximate key private equity characteristics without locking up capital.
Private Equity’s Other Illiquidity Premium
Man Group
John Lidington
Research
14 Pages
Key Takeaways
Diversification questioned: Private equity returns move closely with public markets, so diversification benefits look smaller than often claimed.
Smoothing trade offs: Performance smoothness reduces visible drawdowns yet can mask leverage and economic risk that investors ultimately still bear.
Liquid substitutes: Public equity portfolios can mimic many private equity exposures while offering lower fees and greater transparency.
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