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The Paper Trail: A Golden Dilemma

Welcome to the May edition of The Paper Trail! I hope you had a relaxing and enjoyable MDW. 

Earlier this month, tens of thousands of people descended upon Omaha, NE from all over the globe for what is colloquially known as "Woodstock for Capitalists." I'm talking of course about the Berkshire Hathaway Annual Meeting and this year's was special in that it was the first since the passing of Charlie Munger late last year. 

I've never made the trek to Omaha (it's on my bucket list), but I recently returned from my own annual pilgrimage - Capital Camp. I've been to all five Camps since the inaugural one in 2019, and the experience keeps me coming back year after year to what has become a very special place to me - Columbia, MO. Their website describes it as "serious investing conversations in shorts and sandals" but I don't think that does it justice.

Here's a few pics from this year's Camp:

Our hosts for the week - Patrick O'Shaughnessy and Brent Beshore

Knife forging demonstration - you know, just your standard investment conference activities

The finished product (after weeks of work)

Fantastic session from David Perell on how to make business writing not boring.

Don't mind if I do

Great setting, great people

Now let's get down to business. This month's research roundup features:

  • Gold prices - are they too high?
  • The rising popularity of continuation funds
  • Publicly-traded REITs
  • Enhanced tax-loss harvesting through long-short extensions
  • Recent hedge fund performance
  • Illiquidity buckets for HNW investors
  • Lower-middle-market PE investing
  • Managed futures carry strategies
  • Machine learning and market timing
  • Parallels between the Dom Com bubble and today's AI mania
  • And much more!

“bps” (reading time < 10 minutes)

Will continuation funds continue to grow in popularity as a private equity secondaries strategy?

"GP-led transactions are not going anywhere and are expected to remain a major part of the growing secondary market. Exits through continuation funds are expected to reach $9 billion this year, an increase from $6.5 billion in 2023."


The Growing Popularity of Continuation Funds (Marquette Associates)

Are the right catalysts in place for a rebound in publicly traded REITs?

"Post-GFC, REITs have optimized balance sheets, reduced leverage, and diversified debt sources, giving them access to capital at competitive costs. This positions them well for growth opportunities, which include acquiring assets from the private market struggling with debt refinancing. Furthermore, REITs’ exposure to high-growth alternative property types, fueled by demographic and technological shifts, offers potential for strong returns as they capitalize on operational expertise and scalable platforms to capture secular demand tailwinds."


Why REITs Now: Unlocking Opportunities in Today’s Market (CenterSquare)

Can long-short extensions improve the tax-loss harvesting results of direct indexing strategies?

"In the past couple of years, a new, more active form of tax-loss harvesting has emerged and started gaining traction in the high net worth segment of the market. Often known as a 130/30 extension, this advanced version of tax-loss harvesting is constructed by purchasing a 130% long position in the market and combining  that with a 30% short position. Combination of these two positions results in full market exposure (100%) but offers more opportunities for tax-loss harvesting."


A Motor for Your Sailboat: Getting There Faster with Enhanced Tax-Loss Harvesting (Brooklyn Investment Group)

Should investors "de-silo" their fixed income allocations?

"In our view, these performance dispersions result from bond markets often failing to price in the complexity and crosscurrents inherent in the asset class. These failures are partly due to the fragmentation of those markets. When different fixed-income sectors are managed in silos, as they so often are, many of the risk and pricing signals coming from sectors outside one’s silo get missed. That can lead to fixed-income asset allocation remaining static and suboptimal at the portfolio level, but also within each sector silo."

De-Siloing Your Fixed Income Portfolio (Neuberger Berman)

Can strong YTD performance by hedge funds be explained by exposure to the momentum factor?

"As a reminder, time-series momentum is exploited by trend-following strategies and it can also appear in other quant macro type strategies while cross-sectional momentum can appear in strategies such as equity long-short and statistical arbitrage."

Paid to be Paranoid: 99 Problems but Hedge Fund Performance Ain’t One (Man Group)

What options to high-net-worth investors have to add an "illiquidity bucket" to their portfolio?

"Interval funds and tender-offer funds are available to a broader group of investors and have lower minimums and more flexible features. Like traditional mutual funds, they are continuously offered, provide daily valuations and 1099 tax reporting. Unlike traditional mutual funds, they can hold illiquid investments, and their liquidity provisions are quarterly, not daily."


The cost of being too liquid (Franklin Templeton)

“pieces” (reading time > 10 minutes)

Are Gold prices too high?

"High real gold prices presage future unattractive real gold returns. Gold purchases and sales by market participants, such as gold owning ETFs and “de-dollarizing” central banks and others, can affect the real price of gold and prospective real gold returns. There is no simple and unarguable way to calculate the impact of gold market participants on the real price of gold. There are debatable and approximate ways to speculate about the contours of this market impact."


Is There Still a Golden Dilemma? (Claude Erb & Campbell Harvey)

How does asset-based private credit differ from corporate direct lending?

"In asset-based private credit, the lender assesses the collateral value of the assets for the loan and typically lends a percentage of that value, with the shortfall in the capital structure being made up via equity investors. Whereas the underwriting of a direct lending opportunity is based on the lender’s routine financial analysis of the company and, ultimately, the ability of the borrower to meet the loan interest payments as and when due, asset-based credit typically requires specialized expertise and extensive diligence to properly assess the value of the underlying collateral."


A Primer on Asset-Based Private Credit (Castlelake)

How should PE investors in lower-middle market companies think about portfolio construction?

"So if the lesson is that the world is more correlated than we think, an implication is that we can’t engineer our way to stability when constructing an investment portfolio or building a business. Instead, we have to accept that there will be instability and that when it happens, there will be a lot of this at once. The two ways to handle this are (1) temperament, i.e., know ahead of time what you’ll need to do to keep your cool, and (2) structure, i.e., your agreements with others and liquidity requirements can never turn you into a forced actor."


Portfolio Construction & The Lower Middle Market (Permanent Equity)

Do futures-based carry strategies belong in a diversified portfolio?

"The potential benefits of carry must be weighed against the inherent risks and uncertainties characteristic of financial markets. Investors are
encouraged to consider carry strategies as part of a broader, diversified investment approach, always mindful of the dynamic
and evolving nature of market conditions."


Managed Futures Carry: A Practitioner’s Guide (ReSolve Asset Management)

Can machine learning techniques be used to predict asset returns?

"The performance improvements are real but modest, consistent with the view that machine learning applied to return prediction leads to evolutionary, not revolutionary, wealth gains."


Can Machines Time Markets? The Virtue of Complexity in Return Prediction (AQR)

Can investors draw from lessons learned during the tech bubble of the 1990s in navigating the hyper around Generative AI?

"The most successful companies to emerge from tech transformations are often not the existing stars at the beginning."


Learn from Last Tech Bubble to Embrace GenAI Mania (Research Affiliates)

About the author

Phil Huber, CFA, CFP®

Phil is the Head of Portfolio Solutions for Cliffwater, a leading alternative investment adviser and fund manager. Prior to joining Cliffwater in 2024, Phil was the Chief Investment Officer for Savant Wealth Management, a multi-billion dollar wealth management firm. Phil has been involved in the financial services industry since 2007. He earned a bachelor’s degree in finance from the Kelley School of Business at Indiana University. He is a member of the CFA Society of Chicago. More about me here. Twitter: @bpsandpieces

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