Hedging the Real Risk of Private Equity

OpinioPro Selection
Door september 9, 2019 18:11

Hedging the Real Risk of Private Equity

Most hedging conversations with investors focus on hedging the public portion of their equity portfolios. However, more recently, we have increasingly been receiving inquiries regarding hedging private equity (‘PE’). These questions come even as allocations to PE have been increasing as a percentage of overall assets. Public pensions awarded 64% more mandates in PE in 2018 than they did in 2017.1 Typically, little to no capital is allocated to managing PE risk, even though underlying assets are effectively leveraged equity. In part, risk mitigation in PE poses a challenge as cash flows generally do not support much capacity to spend on option premiums. However, investors may also be taking comfort from the low volatility of the reported returns and seemingly relatively benign drawdowns during crises.2 While these very smooth returns imply low risk, we believe investors would be wise to judge those reported results cautiously. 

OpinioPro Selection
Door september 9, 2019 18:11

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