Cliff Asness of AQR Continues to Write From the FU Money Standpoint for Our Benefit

Private Equity

Public equity performance hurt, particularly in the U.S. which was our entire equity benchmark by 2025, but we knew public stock markets are sometimes volatile.

That said, in all honesty, we had hoped for much more protection from this volatility from our extensive (like half the portfolio at the peak) allocation to privates.

Alas, sadly, and totally unforeseeably, it turned out that levered equities are still equities even if you only occasionally tell your investors their prices (and when you do, you do not really move prices that much). Disappointing, but PE acting like equities would have been tolerable if they had actually outperformed public markets, but they underperformed!

It seems that eventually, and a 10-year disappointing market counts as “eventually,” even privates have to be (mostly) marked-to-market. We really did not see this underperformance coming. After all, the prior 30 years saw much higher IRRs on private equity than total returns on public equity.

What we didn’t count on, I mean who could see this coming, was this outperformance reversing. I mean, what better way is there to estimate what will happen in the future than looking at what happened in the past!?

One super-subtle tipoff we missed was that, like us, every allocator in the world loved privates back then precisely because it didn’t seem that they ever went down a lot—even when the equity market fell sharply. Laundering our volatility made life so much more pleasant and our investments so much easier to live with! Unfortunately, it also turned out that “more pleasant,” especially when everyone is engaged in pursuing the same kind of “more pleasant,” has a cost.

So at the end of the day, a lot of managers got paid a **** ton of money for less-than-equity returns, with at-least-as-high-as-equity risk, just so allocators could feel safe in their jobs and to make sure others thought they were on the cutting edge of investing.