The Paper Trail: Truth or Trend

This past Thursday night, I was on a return flight home to Chicago from a work trip in New York. On Friday morning, I woke up in Columbus, OH...

Flight delays are unpleasant, but expected. Being 20 minutes from your home airport, only to have the pilot come on the PA system to tell you you're being diverted to another city, is unexpected.

It had already been a very long evening (3+ hours of delays before departing LaGuardia) before this weather-induced change of plans and I was eager to get home to my wife and kids and sleep in my own bed. Instead, I got some shut eye at the Columbus airport Marriott, found a nearby Starbucks to get some work done the next morning, and finally made my way home Friday afternoon - just in time for the weekend!

In life, and investing, we are regularly confronted with things outside of our control. How we react in those moments is often more consequential than the moments themselves. It's easy to get angry, point fingers, seek blame. It's harder, but more useful, to maintain your composure, accept reality, and deal with it.

Now, please enjoy the latest edition of The Paper Trail (including the latest Cliffwater white paper from yours truly.) June's research roundup features:

• Diversification within trend-following strategies
• Growth equity in PE
• The state of core real estate 
• Middle market misperceptions
• Bond market signals 
• Continuation fund performance
• Stagflation risk
• Private equity's challenging exit/fundraising environment
• Tax-aware long-short strategies
• Second-order AI investment opportunities
• Private capital and professional sports
• Factor Timing
• Europe's private credit moment
• Performance persistence in private markets

Should trend-following strategies trade more or fewer asset classes?

"Simply put, the more markets traded, the more bets you can take and the more trends you can take advantage of. The benefits of increasing the number of markets traded is further amplified as inter-market correlations decrease, whether that be a function of the environment we find ourselves in, or by the nature of the markets added."

Truth or Trend: Separating Signal from Noise (Man Group)

Is growth equity an overlooked segment within PE?

"Growth equity has evolved into a distinct and compelling strategy within private markets. It may not grab as many headlines as the latest unicorn startup or mega buyout deal, but we believe growth equity represents a sweet spot worth greater attention—offering strong fundamentals, lower loss rates than early-stage venture, minimal leverage, and a strong track record of long-term performance."

Growth Equity: Private Capital's Overlooked Sweet Spot (Cliffwater)

Has private core real estate found a bottom yet?

"Returns have turned slightly positive for the core real estate asset class, although we are not expecting a V-shaped recovery this time around, as cap rate spreads remain tight. Many funds are facing a number of challenges, including high redemption queues, higher leverage levels, and higher portfolio costs, hampering funds’ abilities to optimally manage portfolios and forcing many to be net sellers in a market that will favor those with capital to spend."

State of the Core Real Estate Fund Universe (Verus)

Do middle-market private loans contain more structural protections than "up-market" loans in the broadly syndicated market?

"Beyond financial covenants, middle market loans also benefit from stronger documentation. This includes tighter negative covenants that restrict borrowers from actions such as incurring additional debt, paying dividends or making restricted investments – activities that could otherwise erode liquidity and compromise collateral. This stands in contrast to up-market dynamics, where supply-demand imbalances and precedent legal norms have shifted negotiating power toward sponsors, resulting in more borrower-friendly terms and weaker protections for lenders."

Understanding Middle Market Direct Lending: Opportunities, Advantages and Misperceptions (PGIM)

What signals are global bond markets sending investors?

"The synchronous steepening in developed yield curves to date is reflective of the market’s fiscal sustainability concerns pushing long rates higher, while slowing global inflation and economic growth lower front-end rates. This is a global phenomenon, not a U.S. one, and while the weakening of the dollar has been swift, we see this as a healthy recalibration of value rather than the beginning of a long unwind of the dollar’s reserve currency status."

The Waiting Place (TCW)

How have Continuation Funds performed in comparison to traditional buyout funds?

"The 3rd Continuation Fund performance study reinforces the thesis underpinning the asset class—a positive selection bias of best-performing assets that GPs wish to “buy again” for another investment cycle."

Q4 2024 Continuation Fund Performance Report (Evercore)

Is there anything investors can do to mitigate the impact of stagflation should it rear its ugly head?

"Stagflation represents an “uncomfortable middle ground” for the economy and markets – a scenario of dual threats that demands careful preparation. Because it is impossible to predict exactly if or when stagflation will occur, it is prudent to adopt a stance of preparation over prediction. This means contemplating ways to build a resilient portfolio that can adapt across a range of scenarios, including the rare but consequential risk of stagflation. Such resilience likely comes from diversification beyond the traditional 60/40 paradigm. For example, investors may want to consider inflation-linked assets such as TIPS, real assets, commodities, as well as other alternative return streams that may hold value when equities and nominal bonds are struggling."

Is the worst of both worlds returning? Understanding stagflation risk – a stagflation primer (Meketa)

Will the PE liquidity/fundraising environment show any signs of improvement in the second half of 2025?

"Ultimately, fund-raising across all private asset classes is about supply and demand. More than 18,000 private capital funds are on the road, collectively seeking $3.3 trillion. That means there’s about $3 of demand out there for every $1 of supply (see Figure 6). It remains to be seen how much the emergence of private wealth as a source of funding can ease this mismatch by boosting supply."

Leaning Into the Turbulence: Private Equity Midyear Report 2025 (Bain & Company)

What are the primary considerations for investors evaluating tax-aware long-short (TA LS) strategies?

"For decades, long-short managers have utilized leverage and shorting to generate returns in excess of financing costs. There is no reason for investors to view TA LS strategies differently from any other long-short investment. When evaluating a TA LS strategy, it is important to ensure the pre-tax alpha expectations are high enough to meet return objectives net of all financing costs and fees. As stated above, it is significantly easier for an experienced long-short manager to become tax-aware than for a long-only loss-harvesting provider to become a profitable long-short manager."

Experience Matters: Addressing Five Common Criticisms of Tax Aware Long-Short (TA LS) Strategies (AQR)

Where might the "second-order' investment opportunities exist in AI?

"The long-term outcome for chip manufacturers remains uncertain, but the history of other disruptive technologies suggests that capitalism ensures early advantages are eventually competed away. However, we have conviction in one second-order effect of AI: significant productivity gains in both blue- and white-collar labor."

AI Beneficiaries: Investing in Second-Order Effects (Counterpoint Global)

Why is private capital so smitten with professional sports?

"Not only have sports franchises been a predominantly uncorrelated asset to the public markets at large, but the growth opportunities are evident. While these teams have an obvious overlap with technology and media, sports investments have a much different return profile. These minority investments have a return profile similar to real estate, with an upside from expansion opportunities rather than typical growth equity minority investments. The long-term media rights with built-in escalations are similar to long-term leases. Sports remain the ultimate content-generating machine, especially because most sports content is consumed live."

Private Capital in Sports: PE Is Up to Bat (PitchBook)

Can equity factors be successfully timed?

"We show that applying these strategies to the standard U.S. Fama-French factors generates statistically significant outperformances. However, we also identify the caveats with each of these strategies, such as questionable profitability after accounting for implementation costs due to high turnover, or substantial performance decay in recent years."

Caveats of Simple Factor Timing Strategies (Robeco)

How do European private credit spreads compare to their US counterparts?

"European direct lending deals tend to offer 25–50 basis points of spread enhancement versus US equivalents due to regulatory fragmentation, multi-currency structuring, and legal complexity—creating opportunities for lenders with cross-border expertise and scale."

The Continental Shift: Europe’s Private Credit Moment (Apollo)

Is there performance persistence in private markets?

"Our results suggest that investors should look at performance metrics only when funds have distributed most of their capital and be wary of appraisal values for in-flight funds, particularly in dislocated markets. Furthermore, we find it may be easier to improve portfolio outcomes by diversifying across strategies and vintages rather than focusing on manager selection based on historical data."

Chasing Shadows: Predicting outperformers in private assets (PIMCO)