Analyze How Private Equity And Hedge Funds Affect Portfolio Risk

IN THE WAKE OF the global financial crisis, money flooded into private equity as yield-hungry investors chased returns.

- EVERETT PERRY

Performance boomed: Historically low interest rates catalyzed economic recovery and helped portfolio companies prosper. One data point: The number of private equity-backed companies in the U.S. increased to 8,000 in 2017, from 4,000 in 2006, according to a 2019 McKinsey report. Now, in the midst of the pandemic, portfolio company exits have all but dried up, raising questions about future earnings and causing more uncertainty for investors.

Hedge funds had a rougher road in the decade before the pandemic. Rock-star fund managers closed up shop, and institutions reduced allocations as steep fees became hard to justify. The Bloomberg All Hedge Fund Index returned an average of only 2.8% a year during the 10 years through July 31, while the S&P 500 returned 11.3% annually on average. In more recent months, though, the choppiness caused by Covid-19 has pushed allocators to increase their hedge fund holdings, especially in North America, in hopes that fund managers can take advantage of the volatility and mispricings.

Asset owners have more exposure to alternative strategies than ever, yet many still analyze their portfolios in a bifurcated way. They use sophisticated models to quantify risk and hedging ratios for stock and bond holdings, yet turn to subjective analysis and whatever delayed data managers are willing to divulge when analyzing their alternatives books.

There is, however, a solution for that. Bloomberg’s Portfolio & Risk Analytics (PORT) platform enables users to quantify aggregate risk of their portfolios even if they hold illiquid and opaque assets such as private equity and hedge funds.