A Quant Approach to Private Equity, kaChing and Covestor

Filing this under: YOU HAVE GOT TO BE KIDDING ME!!!

I clearly should have blown up a few funds, fundraising would be much easier…

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Mint 2.0

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Lots and lots of press lately for kaChing and Covestor.  I have my own thoughts on their business model (probably a longer post later), but I think they are missing a huge opportunity – outsourcing for RIAs.

Nothing out there currently exists as a tech platform for RIAs.  Think AlphaMetrix but for the RIA space.  Think BrightScope but for the RIA space.  (kaChing looks like they have this idea as a side pocket but I think it should be focus #1.)

The biggest problem as an RIA is operations.  (Believe me, I run a RIA as well as private funds and it is an ENORMOUS legal, regulatory, and operational headache.)

The biggest problems from an individual investor standpoint are fees, performance, and transparency.  Try and get performance info on the thousands of RIAs out there – it’s impossible.  Are they GIPS verified?  How much AUM do they have?  Has the firm been sanctioned?  A friend passed along the book Wealth which mentions the opaqueness of the RIA and brokerage space – a huge problem and opportunity IMO.

From a RIA perspective, the biggest hurdle is legitimacy – is the company going to be around in 5 years?  (Fidelity and Schwab sure are.)  And both sites have a very strong retail web 2.0 vibe – not really what a lot professional money managers want to impress when pitching clients.

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Lots of chatter lately about endowments puking up their private equity portfolios.  (And interesting companies popping up to facilitate private transactions like Sharespost and SecondMarket).

I always wondered why big investors of private equity (like the endowments and pension funds) don’t hedge their portfolio at all?  If they assume that they are top quartile, which they have to assume becuase otherwise they should be buying SPY and QQQQ, then they are assuming they’re generating alpha returns.  So why not hedge out some of that risk through a static, or better, dynamic hedge?  Hedging against long bear markets is a great idea because not only are their holdings going down in value, but their exits disappear.  Anyways, ping me if anyone does this I’d like to chat with them.  Is there such a thing as a market neutral private equity investor?

We talk a lot about private equity in the book, and a lot about why using the ETFs (ETNs) in the US doesn’t make any sense.  Anyways, below is the 10 month SMA on the not-recommended PE ETF.  Looks like you would have sold somewhere in the 20’s and bought back somewhere around 8.  Not too shabby.