[smabie]

I kind of doubt that doing VC without being very high profile has better risk adjusted returns than SPY. Of course this somewhat hard to calculate on the VC side due to the lack of transparency and illiquidity of the market.

But in fact that author is going about this all wrong. It doesn't really matter if VC outperforms. The point of VC or hedge funds or any other alternative investments isn't to outperform the market on a risk adjusted basis (though that would be nice), but to provide a uncorrelated return stream.

When these uncorrelated or less correlated return streams is mixed into the standard market return stream, the risk adjusted return of the entire portfolio is enhanced. This is why you shouldn't focus on the individual risk/return profile of an asset or investment, but instead focus on the entire portfolio.

A great example of this somewhat counterintuitive statistical phenomenon is gold. Gold historically has had both high volatility and low returns. However, due to the low correlation to the market, mixing in gold to a SPY portfolio and performing a minimum variance optimization to determine the weights actually boosts the return/risk profile.

If anyone is interested, I have a blog post about it: https://cryptm.org/posts/2020/07/09/alt.html

[manyhats]

Equities in a given sector, whether public or private, tend to be highly correlated, but external observers just don't really get the full picture unless they dig into the specifics of the situation.

IME, private marks in aggregate are less volatile than equivalent public performance for a wide range of reasons, but that doesn't mean that a private manager can liquidate a portfolio company at an optimistic mark in a downcycle any more than the manager wouldn't be able to get a better price than the last mark in an upswing.

I think it's also worth clarifying for other readers that the risk you're talking about is volatility and has nothing to do with the actual fundamental risks of a given investment. Private equity (broadly defined) managers look to minimize risks in their investments, but they're talking about business and financing risks. I don't think I've ever heard a private equity manager ever talk about minimizing volatility and I'm ok with that.

[nl]

> But in fact that author is going about this all wrong. It doesn't really matter if VC outperforms. The point of VC or hedge funds or any other alternative investments isn't too outperform the market on a risk adjusted basis (though that would be nice), but to provide a uncorrelated return stream.

This is correct, but it's pretty clear the the author isn't viewing angle investment in mere economic terms (which is an extremely sensible thing to do).

From the post: "When you invest in a startup, the money directly goes to the economy to build up a business, to create jobs and to actually contribute to the trickle down economy."

[chii]

> From the post: "When you invest in a startup, the money directly goes to the economy to build up a business, to create jobs and to actually contribute to the trickle down economy."

and this is completely wrong.

The money public investors pay to exiting shareholders do play a major role in the economy - it enables the early, IPO/angel investors to exit, and allows them to convert capital locked in the established startups to new startups, without waiting to "cash-out" using the company's profits (which may be years away).

In other words, the public markets makes capital movement much more efficient. It lets high risk takers take on bigger risks (for the corresponding potential return), without taking up the required time.

It's a misconception that many people have, that investing in the public markets is less useful to the economy than direct investment. Both play a critical role, and without one or the other, the capital markets will be _way_ less efficient.

[ponker]

In the aggregate this may be true but the public markets don’t need any given investors. There are hundreds of thriving startups that simply would not exist today if ten people who did invest had chosen not to invest. No public company is that dependent on investors especially if they don’t need to make another offering.

[nl]

> The money public investors pay to exiting shareholders do play a major role in the economy - it enables the early, IPO/angel investors to exit, and allows them to convert capital locked in the established startups to new startups, without waiting to "cash-out" using the company's profits (which may be years away).

Sure, this is true. But there aren't any early investors in Exxon (for example) cashing out this way.

[chii]

> But there aren't any early investors in Exxon (for example) cashing out this way.

The process is continuous, until the day Exxon dies or closes shop. The chain of "cashing out" needs to be maintained for the chain to even exist in the first place.

If there were no "secondary" investors, then the only way for an initial investor to reap their returns is via the profits generated, which can be many many years away.

But these "secondary" investors are in the same position - they may want to only invest for a set interval of time. So they have to "cash out" by selling to "tertiary" investors. And so on.

And as a company becomes more mature, their expected returns are more certain, and also lower (i.e., lower risk). So the tertiary investors are people who don't want to take high risks, and want a steady stream of income.

The problem i have with a lot of people's misconception is that they think that buying/selling shares are useless activities, and does not benefit the overall economy.

[WJW]

I have been thinking about this a lot. The difference in preferences between classes of investors can be be huge. Pension funds and the like have massive amounts of capital and a constant demand for cashflows but relative low manpower, so they are looking for very stable investments. Angel investors are almost the opposite as they have much more "labor" available relative to their capital, so they are looking for speculative stocks where they can contribute knowledge and connections to make a difference. There is a whole spectrum of investors between these two and it makes sense for stocks to slowly migrate to being owned by the "boring" end as the underlying company matures.

[Retric]

I strongly disagree that using such methods to calculate a minimum variance optimization is a reasonable benchmark for portfolio performance. The issue is limited historic data is a very poor fit for future risks.

Looking at gold over the last say 2,000 years years shows a very bumpy ride with large long term negative returns. Stock data doesn’t have anything close to that kind of history, but looking at various historic stock markets again shows a lot more variety than simply reviewing a winner like the US stock market.

Essentially, with bad enough assumptions or data any calculation is meaningless.

[incognition]

I agree with this analysis. Anybody going off on Sharpe ratios has to extend that analysis to long tailed distributions, which venture investing certainly is. For example, if you do actually hit the Uber of companies, one early investor in Uber put in $5000 and reaped 20 million.

[x87678r]

Also she literally says she performance isn't the most imporant, she wants to improve the economy rather than shuffle ownership of existing corporates.

> When you invest in a startup, the money directly goes to the economy to build up a business, to create jobs and to actually contribute to the trickle down economy. On the contrary, investing in the public market is simply buying stocks from other investors. The money doesn’t directly go into the economy.

[smabie]

Then why did she write an article about angel investing returns?

[pz]

"Caring about the economy" and "analyzing returns" are not mutually exclusive.