A Quant Approach to Private Equity

| About: PowerShares Listed (PSP)

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 because 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 (NYSEARCA:PSP). Looks like you would have sold somewhere in the 20’s and bought back somewhere around 8. Not too shabby.

[click to enlarge]