Large asset managers like Blackstone and KKR are aggressively building retail channels to sell products that provide exposure to private assets. This is achieved through various fund wrappers like closed-end funds, interval funds, and tender offer funds, which stretch the boundaries of traditional regulated vehicles.
The closed-end fund (CEF) structure is a primary vehicle for holding illiquid assets, creating a fixed pool of capital. This structure leads to a major drawback: shares often trade on the secondary market at a steep discount to the fund's actual Net Asset Value (NAV), as seen with the Pershing Square PSUS fund.
A key criticism of funds holding private assets is the lack of transparency in valuation. The practice of marking illiquid assets infrequently (e.g., quarterly) based on opaque internal models creates an artificial smoothness in returns, a concept Cliff Asness calls 'volatility laundering'.
These hybrid funds are characterized by high costs, with management fees around 2% that can escalate to 3-4% due to 'fees on fees' from underlying fund investments. Furthermore, they are often 'roach motels' where capital goes in but is difficult to get out, with limited or non-existent redemption options.
Keep pulling the thread on Dave Nadig.