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Forum Post: Living in Lake Wobegon

Posted 4 years ago on April 7, 2014, 1:30 p.m. EST by schmoot (76) from Kerrville, TX
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Private Equity's Lake Wobegon Fallacy: All Investors Are Above Average Posted on April 7, 2014 by Yves Smith

Reader Greg Hill sent us a letter he wrote to the Seattle Mayor and City Council questioning its decision to triple its commitment to private equity when they've not only consistently underperformed their benchmark for that strategy, but even done less well than if they had simply invested in US equity.

That letter led us to look at a request for proposal (RFP) that the City of Seattle Retirement System issued just a few weeks ago, where it is seeking an advisor to manage its private equity program. We've embedded it at the end of this post.

On page 7, The RFP sets forth a requirement for the to-be-hired private equity advisor to achieve:

The investment objective is to achieve consistent top-quartile private equity returns while providing diversification to other asset classes. Additionally, the program manager is expected to achieve, over the course of a manager's term, the following:

An annualized dollar-weighted internal rate of return (net of fees and expenses) in excess of 3% above the Russell 3000 Index return.

An annualized dollar-weighted internal rate of return and return on invested capital multiple (net of fees and expenses) in excess of top-quartile benchmark represented by Thompson Venture Economics, on a comparable vintage year basis.

This statement is revealing, and not in a good way. Mind you, it's not because the City of Seattle is unusual for expecting that it can consistently out-invest more than 75 percent of private equity limited partnership investors. It's the opposite. Seattle's investment objective is revealing because it's the stated goal of almost all LP investors in private equity, who almost universally believe the mathematical impossibility that all of them can assemble a portfolio of PE funds that will beat the performance of three quarters of their peers.



note: Only in the delusional world of Rand, Reagan and Friedman/Mises do zero sum conditions not rule all games. - schmoot



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[-] 5 points by schmoot (76) from Kerrville, TX 4 years ago

Where have all the investments gone, long time passing?



[-] 5 points by schmoot (76) from Kerrville, TX 4 years ago

So there is no conservation of matter and energy! Do you think anyone ever takes you seriously about anything?

Thought in minus thought out equals zero, whether or naught there was ever a thought.

[-] -2 points by friedmanmises1 (-42) 4 years ago

Matter and energy are not wealth. A crappy book and a good book have the same amount of matter. However, one is worth more than the other.

I may as well say, because of conservation of energy and mass, population will never increase.

[-] 4 points by schmoot (76) from Kerrville, TX 4 years ago

You may well say anything. But the value of what is said, like the value of material wealth, is in the eye of the more equal pig that beholds it. Or not. In any case abstractions may represent wealth but only material things, subject to the laws of conservation and therefore zero sum reality, can be substantial wealth.

That is substantial as opposed to non material. ie: not matter or energy.

[-] 5 points by agkaiser (2046) from Fredericksburg, TX 4 years ago

Compromise with conservatives will never overcome semantic differences. Neither side will ever learn the other's language.

[-] 2 points by equibble (34) from East Point, GA 4 years ago

Without zero sum conditions in thermodynamics, perpetual motion is possible. Do I have an investment for YOU!!!

[-] 5 points by schmoot (76) from Kerrville, TX 4 years ago

FM's been touting the Wall St perpetual motion of money all along. He only sees what politically correct cons are allowed to see. That's nothing real or material. They don't really believe economics is a science, because for them it's not connected to material reality. Making money off money is totally abstract. Just like the contemporary monetary theory that shills like Friedman and von Mises promoted, it can only exert a negative influence on real economy.

[+] -6 points by friedmanmises1 (-42) 4 years ago

Economics isn't thermodynamics….