The Paper Trail: First Principles

Fall conference season is officially underway, which meant making the annual pilgrimage to Huntington Beach for the Future Proof Festival earlier this month.

I joined Danielle Singer of Invesco and moderator Emma Cary of With Intelligence for a conversation about a question that keeps getting more complicated as the investment menu expands: What actually deserves a place in a client portfolio?

We covered sizing and implementing alternatives, the continued evolution of evergreen private market funds, liquidity and due diligence, and where crypto fits alongside more traditional alternatives. A lot to squeeze into 30 minutes, but a fun conversation in a setting that beats the typical hotel ballroom.

September also brought a much more personal milestone: my dad’s retirement after 40+ years as a financial advisor. I wouldn’t be in this business without him, and had the unique privilege of working alongside him for ~16 years, so getting to celebrate his career with his closest family, friends, colleagues, and clients was pretty special. It also offered a nice reminder of something my dad always seemed to know instinctively: this is ultimately a people business, built on trust and genuinely caring about the people you serve. Happy retirement dad (and mom)!

There was plenty to read along the way, and even a little writing of my own. This month’s Paper Trail features a Cliffwater doubleheader: Real Assets, First Principles, which I co-authored with Sean Brennan, and Decoding Defaults in Private Credit from my colleague Fran Beyers on our credit team. The rest of the reading pile ranges from small buyouts and continuation vehicles to AI, inflation, long-short equity, evergreen funds and the evolving role of hedge funds in portfolios.

Here's what made the cut in September:

🏗️ Building diversified real asset portfolios
📏 Measuring private debt defaults
🐟 Finding opportunity in small buyouts
🔐 Defining the asset-backed finance opportunity
⏳ The rise of continuation vehicles
🧰 Rethinking the role of hedge funds
🫧 AI and the coming wave of equity issuance
🔭 How investors interpret a changing world
🦄 The migration from public to private equity
🌡️ Preparing portfolios for inflation uncertainty
♾️ Investing with a 100-year horizon
🏆 The economics of trophy assets
⚖️ Setting expectations for long-short equity
🌱 Fulfilling the potential of evergreen private market funds

What does a well-built real asset portfolio actually look like?

"Seeing the forest means building a portfolio that does not depend too heavily on any individual property, manager, sector, or market view. Diversification across managers, property types, geographies, vintages, and risk profiles can reduce dependence on any single outcome without sacrificing attractive return potential. Done well, the whole can be greater than the sum of its parts."

Real Assets, First Principles (Cliffwater)

How can private debt default rates simultaneously be 1% and 20%?

"That is not a typo, and it does not mean one firm is right and the other wrong. ‘Default’ is measured, not observed—and how it is measured changes the answer entirely."

Decoding Defaults in Private Credit (Cliffwater)

Where does private equity alpha come from when cheap leverage and multiple expansion disappear?

"In our view, the lower middle market is where private equity’s fundamental value-creation toolkit—buying well, improving operations, and building better businesses—still has the most room to work."

The Case for Small Buyouts: Backing Managers Early in the Lower Middle Market (GEM)

When is asset-backed finance actually backed by assets?

"But ABF has its boundaries. A collateral pool must be observable, legally transferable, serviceable through stressed markets and supported by enough performance history to model downside outcomes. New collateral types may feel diversified enough but often carry hidden exposure to the same macro variables.

“Backed" to the Future (PGIM)

Does giving a good private equity asset more time actually create more value?

"The primary driver of performance appears to be asset selection. Unlike traditional buyout funds that invest in a portfolio of new companies, CVs are typically created to retain ownership of businesses that private equity managers already know well and believe have further upside potential. The Gottschalg study highlights a positive selection bias, as managers tend to place their strongest-performing portfolio companies into CVs rather than selling them outright."

Continuation Vehicles: Worth the Wait? (Marquette Associates)

What are hedge funds actually supposed to do in a portfolio?

"This process starts by identifying each strategy’s underlying risk factors, alpha source and function in the portfolio, rather than by focusing primarily on its strategy label (long/short, CTA, etc.)."

On the Cutting Hedge: Generating Alpha While Managing Risk in the Current Regime (Neuberger)

Could the AI boom undermine the stock market simply by creating too much new equity supply?

"Our best estimate of this effect—measured by looking at how various predictable, non-informative flows impact the price of the U.S. stock market—is that every 1% increase in the supply of equities leads to a 4% decrease in the stock market’s total value over the next 12 months."

A Catalyst for the AI Bubble Break (GMO)

Can two investors look at the same facts and see entirely different risks?

"Their specialized knowledge leads them to see a different object: the scaling engineer sees a rational effort to relax a technically binding constraint, while the statistician observes an accelerating series without precedent in the sample."

Rules of Relevance (Carlyle)

How much of the investable equity universe has migrated from public to private markets?

"Some of that gap is explained by the ability of companies to stay private while growing their value. Exhibit 20 compares the number of public companies to the number of private companies in the U.S. for various ranges of valuation. In prior generations, many of the private companies valued at $1 billion or more, known as ‘unicorns,’ would have gone public. We now see a substantial percent of them remaining private."

Public to Private Equity in the United States: A Long-Term Look (Counterpoint Global)

How do you hedge inflation without betting on where inflation goes next?

"Investors should be cautious about aggressive tactical bets on the direction of inflation, but inflation-related tails risks should not be ignored."

Inflation Redux (AQR)

What changes when you build a portfolio for the next 100 years instead of the next 10?

"For decades, diversification largely meant combining equities with nominal long-duration positions in government bonds. If a characteristic of the next several decades is instead greater uncertainty around the growth and inflation path, then diversification must evolve. Investors should diversify not only across asset classes but also across macroeconomic regimes, placing greater weight on assets whose cash flows are tied to real, not nominal outcomes and whose value depends less on any single economic narrative. The objective is not to maximize expected return per unit volatility but to build portfolios capable of preserving purchasing power across a much wider range of plausible futures."

The 100-Year Portfolio: A State of Mind Rather Than an Allocation (AllianceBernstein)

Are sports franchises good investments simply because there aren’t many of them?

"A scarce asset can still be a poor investment at the wrong price, with the wrong leverage or the wrong asset scope."

The Trophy Asset Economy (GLASfunds)

What should investors actually expect from long-short equity?

"The aggregate historical record suggests that investors should set expectations from the strategy’s structure rather than from its strongest early results. A portfolio with partial net equity exposure should generally move with stock markets while capturing less of both their upside and downside, and its return should be evaluated in that context."

 
Long-Short Equity (Meketa)

What will it take for evergreen funds to fulfill their potential?

"The structural design, perpetual capital paired with periodic and capped liquidity, is coherent, well-precedented, and, for a definable (albeit not universal) class of investors, superior to the closed-end drawdown alternative."

The Window Narrows: Evergreen Funds and the Choice Before the Industry (CAIA Association)