Hedge funds are dynamic by nature as portfolio managers and investment strategies go through periods of dazzling or disappointing investment performance. Hot funds routinely swell with inflows while weak ones shrink with outflows. That said, it is rare indeed to observe a rise and fall quite as breathtaking as that of the fund Situational Awareness.

Not a Great Situation. For those who missed it in the August haze, a white-hot AI-focused hedge fund called Situational Awareness was forced to fire-sale its entire public equity portfolio to Citadel (reported to be as much as $45 billion) after a decline in its AI-focused stock holdings generated insurmountable margin calls (requests from lenders for more cash) last week.

Situational Awareness is an equity long/short hedge fund run by Leopold Ashchenbrenner, a promising 24-yr old with only two-years investment experience who formerly worked at Open AI. The fund raised over $10 billion in two years and ran highly concentrated bets in volatile AI stocks (long) and software stocks (short). Until July, the fund generated remarkable investment returns, topping 1,000% since its launch. The young fund was apparently levered 4:1 (i.e. it’s assets under management were 4x its equity capital), making it extremely sensitive to any adverse investment performance.

Leopold Aschenbrenner, founder Situational Awareness

Investment Lessons Aplenty The remarkable story of Situational Awareness is so rich with investment lessons it’s hard to know where to begin! The fund’s hair-raising 4:1 leverage? The remarkable concentration and correlation of the fund’s investment positions (all volatile AI longs vs. software shorts)? The prime brokers who lent this young fund enough rope to hang itself (did they forget that Credit Suisse went bankrupt following a similar fund implosion in 2021)? The fund’s evident lack of liquidity (excess cash was tied up in private investments)? That a multi-strategy hedge fund giant came to the rescue, yet again? The hubris of this inexperienced young manager?

Let’s Start with Leverage. The dangers of financial leverage, i.e. borrowing money to increase the size of an investment, are well documented. The Great Financial Crisis, which I traded through as a hedge fund portfolio manager, offered a plethora of lessons on leverage I won’t soon forget. When levered trades work, returns are super charged, but when they don’t, losses increase exponentially and can easily swamp capital.

In the wake of Situational Awareness’ liquidation, my inbox has filled with articles rehashing the dangers of leverage, but how does hedge fund leverage actually work? Who does the lending? What triggers a margin call or a forced liquidation?

Hedge Fund Leverage 101 If an equity long/short hedge fund attracts $1 billion of fresh capital, it typically buys (“goes long”) approximately $1 billion of stocks, generating long market value of $1 billion. It might then bet against (“go short”) approximately $1 billion as a hedge, generating short market value of $1 billion (+ or – 5%). For this typical long/short hedge fund, leverage is approximately 2:1 as its long market value + short market value = gross market value or assets under management of $2 billion, and represents 2x its $1 billion of capital. This happens naturally as shorting stocks requires a fund to borrow the stock from a prime broker, generating leverage.

Prime Brokers: Leverage Providers to Hedge Funds. Prime brokers are key service providers to the hedge fund community, offering everything from securities lending (shorting), leverage, custody (safekeeping and recordkeeping of positions), and risk management. The biggest prime brokers are the largest and most seasoned investment banks, including Goldman Sachs, JP Morgan and Morgan Stanley. Prime brokers typically closely monitor leverage of the funds they lend to, requiring them to put up cash collateral. When trades move adversely and losses increase, prime brokers ask for additional cash collateral, known as a margin call.

Situational Awareness was reportedly levered 4:1, with $10 billion of investor capital behind as much as $45 billion of gross market value (long plus short positions). SA’s losses were sufficiently severe (reportedly 67% in July alone) that it lacked the cash the meet mounting margin calls, leading its prime brokers to initiate a forced liquidation of its positions. The prime brokers called in large multi-strategy hedge funds to bid on SA’s equity portfolio, reportedly including Citadel and Millennium.

Citadel as White Knight. This story certainly makes one wonder which prime brokers were willing to lend this fund so much given its highly concentrated, highly volatile, and highly correlated AI-related bets, not to mention the limited investment experience of its founder. No doubt this information will trickle out over time. Fortunately for SA’s prime brokers, the large multi strategy hedge fund Citadel stepped into the breach and purchased the entirety of Situational Awareness’ positions at a discount. Citadel’s white knight moves saved the prime brokers from dumping SA’s positions in the open market, which would no doubt have created some even scarier market volatility, big losses for the PB’s, and potentially more hedge fund casualties. This is not the first time Citadel has offered much needed liquidity in times of market turmoil and no doubt it won’t be the last. News of Citadel’s purchase stabilized shaky AI stocks and triggered a broad rally in the market.

With its public portfolio sold and leverage eliminated, SA is regrouping. The fund plans to maintain its remaining private equity investment positions, including one in AI-darling Anthropic. Its founder Leopold is apparently asking its investors for additional funds to invest in private stakes.

More broadly, this episode serves as a wake-up call for the hedge fund and prime brokerage communities alike. Prime brokers Goldman Sachs and JP Morgan reported hedge fund gross leverage hit an all-time high last winter, per Reuters. Whether it serves as the beginning of a broader fund and market de-leveraging remains to be seen.

My securities licenses expired long ago. This is not investment advice.

Fund Withdrawal Requests Rise but Fulfillments Decline Data for the second quarter of 2026 revealed that private credit fund investors requested to withdraw $15.6 billion, up from $13.6 billion in the first quarter (per WSJ), totaling almost 14% of industry net assets (or NAV). Fund managers, including Blue Owl, Apollo, and Ares, uniformly responded by holding investors to a 5% fund-level withdrawal limit, also known as “gating.” As a result, private credit funds honored only 36% of aggregate requests to withdraw funds, materially lower than 53% in the first quarter and creating a sizable backlog of money still looking to exit private credit funds. See chart below.

Mind the Gates This industry-wide move to enforce 5% fund-level “gates” represents a change from 1Q where some firms went to great lengths to meet withdrawal (aka redemption) requests. For example, Blue Owl honored 100% of investor withdrawal requests in 1Q, despite its 5% fund level limit. The moves this quarter strand a whopping $14.5 billion of investor money in about 14 retail-focused private credit funds and private BDC’s (Business Development Companies). This backlog of money awaiting withdrawal now approximates about 9% of total industry net asset value (or NAV). Enough to matter.

Source: AltsIQ Research.

The Noise Continues As was discussed in our May column, “Signals, Noise and Wind Shifts” (link), alternative investment managers such as Ares and Blackstone dismissed negative press around private credit retail funds as “noise” on recent earnings conference calls, citing strong institutional demand for private credit and strong credit quality metrics (for now).

These managers may be covering their ears, but the racket is likely to linger. Why? History has demonstrated that individual investors get skittish when their liquidity (or ability to turn their investments back into cash) is limited or revoked, discussed in our March column “Private Credit Fund Fiasco: Finance Lessons” (link) Second quarter data illustrated this stark new reality. Gross new inflows (new money) into retail focused private credit funds plummeted 50% in the second quarter versus the first quarter while net flows (inflows less outflows) dropped 8% in the second quarter, or 44% annualized.

As discussed in our most recent column on permanent capital (link), alternative investment managers need individual investors as a source of permanent capital and future growth as longtime institutional investors reduce new allocations to private markets. Given the strategic importance of individual investors, we are surprised that alternative investments firms are not yet acknowledging consumer liquidity concerns. Time will tell if this continues. Stay tuned for second quarter earnings conference calls with alternative investment firms next month for any shift in the narrative.

My securities licenses expired long ago. This is not investment advice.

Since the Great Financial Crisis, the alternative investing industry has operated as a fast-growing upstart, disrupting capital markets and traditional investing globally. Times are now changing, however, as activity slows in the face of higher interest rates and stiff competition. The alternative investments industry is now maturing. With that, focus has shifted to fundraising, i.e. the ability to attract new investors/new money into fund offerings. While the world’s largest and best performing alternative investment managers such as KKR, Blackstone, and Apollo continue to show healthy double-digit asset growth, broader industry trends reflect a starker reality. Total fundraising for alternatives including private equity, private credit, infrastructure and real estate fell for the fourth year in a row in 2025 and the outlook appears mixed (see figure below).

Source: Bain & Co. and Prequin

The significant decline in fundraising from the 2021 peak is a function of several significant trends. First, many large pools of institutional investor money are now “fully allocated” (i.e. have maximum desired exposure) to alternative investments. Pension funds, endowments and sovereign wealth funds collectively make up the majority of investors in closed-end funds (the standard investment vehicle for alts) and have now reached or exceeded policy targets to private equity (per S&P Global Market Intelligence). Pension funds’ average exposure to alternatives is now over 30%, up from less than 10% in 2001. Further, weak IPO and merger activity since 2022 has limited the realizations of gains on private investments, thereby limiting cash distributions back to investors. This dynamic has the knock-on effect of limiting the cash available to invest in new fund offerings and further suppressing overall fundraising.

The Great Pivot to Permanent Capital. Unsurprisingly, alternative investment managers are now looking to broaden out sources of investor capital. What has emerged is a very calculated pivot towards more sticky “permanent capital.” Essentially, permanent capital is money that doesn’t come with a traditional withdrawal/fundraising cycle but instead is locked up indefinitely or for an extremely long duration. Permanent capital sources include affiliated insurance company balance sheets, publicly listed investment vehicles such as business development companies (BDCs), along with retail investor-focused interval and evergreen funds. Further, 401(k) retirement funds invested in alternative assets (which are just emerging due to regulatory relief) are another source of permanent capital due to their long duration and lockups. See box below for definitions and examples.

Permanent Capital, Permanent Benefits. These permanent capital sources come with significant benefits for alternative managers, including less need for time-consuming fundraising, less concern about overall liquidity, and the capacity to do larger, longer-term deals. As an example, consider Apollo’s landmark $36 billion private credit fundraising for Google AI chips / Anthropic discussed in my last column. Press reports indicate that Athene, Apollo’s wholly owned insurance subsidiary, absorbed most of Apollo’s portion of the debt on this deal, illustrating the benefits of an affiliated insurer working with a large private credit originator. As importantly, permanent capital sources do not require alternative investment firms to forgo valuable management and incentive fees. In fact, some retail focused funds carry higher fees than traditional institutional client relationships.

Many of the industry’s leading CEO’s have argued that permanent capital is the single biggest determinant of long-term franchise value in the alternatives business. A recent article by Hedgeco.net highlighted permanent capital as “a structural reordering of the alternative investment landscape, with far-reaching implications for hedge funds, private markets, and institutional capital allocation.” (Full article linked here)

With this backdrop, it’s easier to understand the deliberate effort underway to sell alternative investment funds to retail investors. Despite the recent firestorm of negative press surrounding semi-liquid private credit funds and ongoing elevated redemption/withdrawal requests, alternative managers continue to dismiss concerns and introduce/market new funds targeting individuals to continue to diversify fundraising sources away from institutions.

The five largest alternative asset managers today (Apollo Global Management, Ares Management, Blackstone, Carlyle Group, and KKR) now oversee approximately $1.5 trillion in permanent capital, almost 7% of the industry’s $22 trillion (per Hedgeco). Expect this total to grow as these highly motivated firms set their sights on growing sticky and stable funding sources.

My securities licenses expired long ago. This is not investment advice.

Big Blue-Sky Thinking. The deal, known as “Big Sky” while in formation, required some blue sky thinking to bring to fruition. Beyond being one of the largest private credit fundraisings ever, Anthropic’s chip-financing deal is being viewed as a blueprint for future deals to finance computing power, aka “compute.” Most of the debt is rated investment grade (i.e. suggesting it carries a very low risk of default), but it is primarily secured by lease payments from Anthropic, a company that is less than five years old and has no credit rating (or measure of creditworthiness). Further, buyers of the debt were not provided any details about the current financial condition of Anthropic due to its upcoming IPO. How is that possible? Investors were comfortable enough because Anthropic’s lease payments are actually being backstopped by Broadcom, large technology company with an “investment grade” or highly creditworthy rating.

Circular Reference? Why would Broadcom guarantee Anthropic’s lease payments? The answer is that Broadcom helps manufacture the Google AI-chips that Anthropic is going to use, making Broadcom a significant beneficiary of this transaction and making this deal a little bit circular. In the same way that GMAC finances some of the cars General Motors sells to consumers (known as sales finance), Broadcom is helping its very large customer (Anthropic) to buy its chips by lending Anthropic its superior credit rating and lowering its borrowing costs. Notably, Broadcom’s stock (ticket AVGO) did not react well to this news last week, declining 22% from June 3^rd to June 10th.

Blueprint for Future Deals? Apollo and Blackstone used a classic asset-based structure to facilitate the chip aka “compute” fundraising, suggesting that alternative investors are now treating AI-chips as financeable assets. Apollo set up a paper corporation, known as a special purpose vehicle or SPV, that raised the debt needed to buy $35 billion worth of Google’s custom chips. The SPV will then lease the chips it buys to Anthropic to use for five years. The debt is backed by the lease payments by Anthropic to the SPV and collateralized (aka backed) by the value of the chips themselves. If for any reason Anthropic misses a payment, the SPV will sell chips or tap Broadcom to make up the difference.

Convergence Ongoing. While Blackstone and Apollo designed the deal, Morgan Stanley arranged the debt, yet another example of the convergence between the roles played by traditional Wall Street and alternative investment firms. While details on the deal are not public, the financial press (the Financial Times and Bloomberg) is reporting that about half the deal was sold to investors and banks (by Morgan Stanley) while the other half was absorbed by Apollo and Blackstone. The Big Sky deal was structured into three so-called tranches (or flavors of debt with different levels of seniority and security) with two senior tranches (that get paid back first) and one junior tranche. The most senior tranche of $6 billion offered investors 1% over five-year US Treasuries bonds and was largely sold to banks. The second senior tranche of $24 billion was sold in the asset-backed credit market to investors with a yield of 5.75%, which is still a very reasonable rate. The remaining lowest, or junior, tranche was not backstopped by Broadcom. Notably, Apollo’s insurance subsidiary Athene is understood to have taken a large portion of the financing.

Like their approach to software, banks have largely been unwilling to finance AI-chips as the primary collateral are lease payments. Generally, banks prefer to lend against hard assets such as factories and real estate rather than lease contracts. Private credit has stepped into the breach once again with creativity and abundant capital.

According to MarketWatch, big tech needs $1.5 trillion to fund the AI boom so watch this space for more financing, more innovation and for more big alternative investment firms to be in the mix.

My securities licenses expired long ago. This is not investment advice.

Each course I teach on alternative investments begins with a unit on traditional investing. Mutual fund/ETF providers, registered investment advisors, and trust banks remain the backbone of the investment industry globally. However, the proliferation and availability of private equity, private credit, and hedge funds as alternatives is having an undeniable impact on the traditional asset management industry as investors seek to diversify away from the increasingly narrow US equity market and pursue higher returns.

To explore this topic further I sat down to record our first podcast with Jeff Whitaker, CEO of Chevy Chase Trust Company, a traditional investment firm with a unique approach to investing client funds. Whitaker’s unvarnished commentary about the rise of alternative investment products and related risks is both insightful and colorful! Our discussion was wide ranging but converged on the importance of liquidity (the ability to turn an investment back into cash), a topic in sharp focus today in the context of private credit funds.

Most people envision traditional asset management as low cost, self-directed investing in pre-existing index funds/ETFs, or actively managed mutual funds of their choosing. Today we don’t hear much about discretionarymanagement of client funds, where a customer turns over control of investment decisions to an asset manager/registered investment advisor. It’s out of the spotlight however, this investment approach is thriving at Chevy Chase Trust, a $40 billion investment manager based out of Washington DC. Chevy Chase’s approach to discretionary investing is unique, utilizing economic and fundamental research-based investment themes to compile investment portfolios such as “The Advent of Molecular Medicine” and “The End of Disinflationary Tailwinds,” which we unpack further on the podcast.

As a stock-based active manager, Chevy Chase’s success bucks the trend among traditional investment managers. This is not to say that the firm has not been impacted by the rise in popularity of alternative investments. Whitaker noted that many of the firm’s clients are involved in alternatives, just not through them. In fact, Chevy Chase did not offer their clients any access to any alternative investments until recently. This may have something to do with Whitaker’s somewhat skeptical view of alternatives, which includes some deep-rooted concerns about the structural liquidity of these investments.

Whitaker noted. “For high-net-worth clients, I don’t know that there is an appropriate alternative investment, which for the most part comes down to one factor, liquidity.” When questioned on the diversification value of alternatives, Whitaker was equally unconvinced. “When I look at private equity, my worry is how differentiated of a return stream is that anyway. It has many more of the characteristics of a levered equity investment.”

We discuss these topics in more detail on our inaugural AltsViews podcast. I hope you enjoy it! Going forward, I intend to continue to publish semi-weekly columns, with more podcast’s forthcoming.

My securities licenses expired long ago. This is not investment advice.

That said, the fine art market possesses many of the characteristics that alternative investors often seek out, such as information asymmetry and limited price discovery, which can lead to a liquidity premium. Art also shows minimal correlation to publicly traded financial markets. As a tangible real asset with global demand, fine art is also compelling as a hedge against both inflation and a potentially devaluing dollar. Today the value of the art owned by individuals globally tops $2.6 trillion (per UBS/Deloitte), larger than either the private credit or venture capital asset classes today. The global market for fine art is truly massive yet remains an enigma to most of the investing public. Instead, the art world is largely closed off to all but uber-wealthy collectors, experts, and museum professionals.

Investment managers have generally not pursued fine art as a return generating strategy. Why? To answer this question, I consulted an expert in the art world who suggested that value creation in art is very specific and more nuanced. For example, most people agree that Picasso paintings are valuable, yet not every Picasso painting appreciates — only specific works from specific periods. Most collectors don’t buy for investment, but rather because they are drawn to specific artworks, which leads to extremely uneven investment returns.

Securitized Fine Art as an Alternative Investment Strategy

One investment company has made significant inroads into art market investing and is drawing attention for its early success. Founded in 2017, Masterworks enables individuals and small institutions to invest in individual works of art through securitization structures. What does this mean? Masterworks uses a data-driven process to identify potential artists with appreciation potential, buys their artworks and then securitizes and sells the paintings to investors. As an example, let’s say Masterworks identifies and purchases a $2mm Jean-Michel Basquiat painting. The firm places the painting in a special purpose vehicle (paper corporation or SPV) and then securitizes it by selling shares in the SPV to individual investors. The SPV exists until the art is sold during a targeted timeframe of three to ten years. Masterworks securitizations are qualified with the SEC under Regulation A and are open to any investor (not just accredited or qualified). In the interim, the firm offers investors quarterly appraisals as estimates of value.

To date, Masterworks has acquired and securitized 525 paintings, largely from the post-war and contemporary periods. The firm has completed 29 exits (i.e. sold paintings), with holding periods ranging from 17 days to 1,398 days, with works by artists as diverse as Claude Monet to Andy Warhol. Realized returns (on a net annualized basis) have ranged from 4% to 325% but most cluster in the mid-teens annualized area. (A sample of Masterworks exits is in figure below).

Source: Masterworks

Compelling Early Returns but Risks Aplenty

Early returns have been compelling. That said, with only 5.5% percent of securitized investments having been realized, it is early to get too excited. Beyond the short tenure, there are other risks to consider. Unlike other alternative asset classes, art securitizations do not generate any cash flows to investors, akin to interest payments from a private credit investment or a cash distribution from a private equity investment. As such, there is no return to offset the annual 1.5% management fee Masterworks charges. The firm also takes 20% of profits as an incentive fee at exit with no hurdle rate. All the value or appreciation of a securitized art investment is realized when it is sold/exited. In finance parlance, it’s all about “terminal value.” Masterworks’ securitizations function like an illiquid closed-end fund in that investors have no ability to redeem their shares before the painting is sold, nor any control over exit decisions, much like a limited partner.

The Masterworks Process

I had the opportunity to sit down with Masterworks Head of Research, Mike Parsons, to learn more about the firm’s investment process. Masterworks relies on a data-driven approach to identify artists with attractive appreciation potential. To do this, the firm has built an extensive database of art sales data and uses machine learning to analyze paintings that have sold more than once, known as ‘repeat sale pairs’ to construct market indices. Using these indices and machine learning, Masterworks identifies compelling artists and then predicts artist growth rates at two-, three-, and five-year time horizons. The research team finalizes selections through the combination of machine learning predictions, historical artist appreciation trends, and art specialist team input. The team also conducts quarterly reviews of artist ratings with its art market specialists. Given the firm’s preference for specific artists, for example Basquiat, the firm takes steps to avoid becoming the whole market for any one artist’s work and tries to stay under 15 to 20% of any artist’s annual market volume.

The Art Market Today: Green Shoots

The fine art market has struggled since 2021 due to rising interest rates and lower demand from Asian buyers, particularly China. That said, there is mounting evidence of a recovery with the return of Chinese high net worth investors driving strong fall art auctions. The fall auctions also saw a record price for a single piece of modern art, with the sale of a Klimt painting for $236 million. Notably, the art market is particularly momentum driven, with one successful auction often a harbinger of future successful auctions. The spring art auctions are taking place this month in New York City and are exhibiting a strong start.

If investing in the art market were easy, more investment firms would likely be pursuing it given its massive size and scope. That said, Masterworks is certainly a firm to watch as securitized art captures a larger share of this global market.

My securities licenses expired long ago. This is not investment advice.

Like all publicly traded companies, alternative asset managers such as Ares, Blackstone, Blue Owl and KKR, report financial results every quarter. After the firestorm of negative news around retail-focused private credit funds, first quarter earnings were hotly anticipated by investors eager to see how redemptions (i.e. retail investor defections) were or were not translating into financial results. Going into the quarter, investor sentiment could not have been worse. The stocks of alts managers had fallen between 25 and 45 percent year to date, reflecting the damaging media frenzy over “semi-liquid” private credit funds and the meltdown in publicly traded direct lenders known as business development companies or BDC’s.

Signals Better than Feared. Three main signals emerged from the first quarter financial results of the alternative managers. First, fundraising flows (i.e. new money raised for investment vehicles) were remarkably resilient in the first quarter of 2026 despite the impact of retail redemptions in private credit funds. Institutional investors such as pensions and sovereign wealth funds continued to pour money into private strategies in the first quarter, including into private credit. Institutions plowed the most capital into infrastructure funds such as data centers and secondary funds (that buy stakes in closed-end funds from existing LP’s/investors). Blue Owl, the alternative asset manager most exposed to both private credit and the retail channel, posted inflows of over $9 billion, up 34% year over year, despite slower retail flows. See figure below from Blue Owl’s slide deck.

Source: Blue Owl Capital Inc.

Ares CEO Michael Arougheti put it well on the firm’s earnings conference call. “...the institutional investor is not anxious. They’re not allocating away from private credit.” He added. “While the US private credit funds are seeing slowing demand, we’re seeing increasing demand elsewhere because of the secular momentum I talked about.”

First quarter results also revealed no evidence of a broad-based deterioration in credit quality within direct lending/private credit (yet). Blue Owl CFO Alan Kirshenbaum noted, “no meaningful adverse movement in metrics such as our watch list, non-accruals, amendment requests or revolver draws.” Managements did voice legitimate concern over the software sector and the widely expected default cycle. However, AI’s impact on the prospects for software will likely take years to play out. Most software sector debt maturities (which require debt to be refinanced) are not until 2028 and 2029, providing some runway. Additionally, all managements emphasized that for a lender to take losses on a loan to a software company, the equity investors in that company (which are typically private equity funds) would take significant or total losses before lenders do. A valid point.

Finally, alt managers minimized the fallout from retail redemptions in private credit funds, largely dismissing the issue as “noise” that will eventually be overwhelmed by the secular shift by individuals toward private assets. Managements noted that first quarter redemptions stemmed mainly from a small number of investors, mainly non-US institutions and family offices, and that the vast majority of investors did not ask to redeem. Asked to look forward, most expect redemptions to continue in the near and medium term but do not see material impacts on all-important management fees going forward. Even Blue Owl expressed confidence that the firm could meet Wall Street’s consensus earnings forecasts, which was a surprise to many. Blackstone Chairman and CEO Stephen Schwarzman noted the following. “External assertions have negatively impacted capital flows in the wealth channel to private credit strategies…Despite the external noise, our institutional and insurance clients, who represent 75% of our credit platform AUM, have continued to commit large-scale capital to the asset class.” ~

Stock investors in alternative asset managers took comfort in first quarter earnings results, triggering a relief rally. Whether redemptions in the wealth channel are indeed “noise” or rather a more nefarious signal of the long-term viability of retail-focused private investment vehicles remains to be seen.

My securities licenses expired long ago. This is not investment advice!

The Middle Eastern conflict has brought into sharp relief the importance of global energy supply chains, particularly shipping. The images of stranded oil tankers in our news feeds reminds us daily. The cost of shipping and storing so-called “wet fuels” such as oil, refined petroleum, jet fuel and petrochemicals has exploded since the conflict began as ships have been forced to re-route away from the Straits of Hormuz and fuel/insurance costs have skyrocketed.

What do shipping disruptions have to do with alternative investing? A key draw of alternative investments is their potential to deliver returns that are not correlated with broader markets. As such, alternative investors are always seeking unique investment opportunities whose returns are somehow insulated from traditional market risks, e.g. investing in music royalties, intellectual property, or tanker shipping. The latter has our attention today.

Tanker Shipping as an Alternative Investment Strategy. To facilitate global commodity shipping, an active market exists to secure ships for single voyages at current market rates, known as the “spot market.” For example, if an oil company is looking to ship a million barrels of oil from the Middle East to Asia (a standard route), the oil company would go to the spot market where ship owners and operators bid to carry the cargo and negotiate a freight rate based on existing market conditions. Once the ship completes the voyage and delivers the cargo, the ship owner/operator gets paid and potentially generates a profit.

I recently had the opportunity to sit down with David Wiswell, Chief Strategy Officer of Namor Shipping. Building off a long career in the shipping and logistics businesses, Wiswell recently joined Namor to manage a global fleet of tankers moving oil and a range of “wet fuels.” More importantly, his firm recently launched a new alternative investment vehicle, a closed-end fund called Turnstone Maritime, that seeks returns from leasing and operating tankers.

Unsurprisingly, the Iran conflict has dramatically improved the profitability of tanker shipping around the world due to the need for ships to re-route around the Persian Gulf (requiring longer voyages) and a lower vessel supply, also due to some ships being stranded in the Middle East. Shippers measure profitability in terms of Time Charter Equivalent (or TCE), which represents total freight revenue minus any voyage costs and divided by the number of voyage days. Essentially it represents the number of dollars earned per day, per vessel. At present, the TCE for a medium range (MR) tanker for refined petroleum products is running at $95,000 per day. This TCE is a 7-9x increase from just twelve months ago. Very large crude carriers (known as VLCCs) are currently fixing at a TCE of $550,000 per day, which is an 8-10x increase over the same period. See figures below depicting TCE’s for Very Large Crude Carriers (VLCC’s) and Medium Range tankers over the last twelve months.

The initial Turnstone Maritime fund is raising capital for a period of 18-24 months to lease tankers and provide shipping capacity/ship wet fuel cargos utilizing the global spot market. The fund would target the generation of consistent profits, e.g. $5,000 to $10,000 per ship per day, despite the volatility of TCE’s amidst recent geopolitical upheaval. Turnstone and Namor plan to partner with one or more large commodity traders to lock in shipping demand and effectively utilize their fleet of ships. To mitigate the impact of TCE volatility on overall returns, Turnstone and Namor would utilize the derivative markets (which allow investors to transfer risk) to hedge the daily earnings (TCE) of any given shipping lane. Shipping and commodity prices are volatile enough that they are willing to hedge up to 80% of the price exposure, forgoing 10-15% of the potential earnings to eliminate the bottom 50% of price moves.

According to Wiswell. “Our aim is to provide access to a global market typically available only to established industry participants. There is limited correlation to public markets and private investments, especially in times of broader, heightened volatility. Our objective is to provide a unique entry point into an otherwise opaque and rather inaccessible market with high return potential. People can buy publicly listed shipping equities, but our goal is to give direct exposure to the freight rates that drive tanker earnings.”

Like any investment, investing in tanker shipping comes with material risks, including the possibility that a ship gets attacked during its voyage (something that can be covered by insurance) and the inability to adequately hedge price volatility in derivative markets. Beyond this, many countries and energy companies are now looking to rely less on shipping wet fuels to limit disruption from geopolitical events, which could lessen demand for tankers over the long term.

The performance of tanker shipping as an investment strategy is yet unproven. However, in a market where the correlations between traditional and alternative investment vehicles have been increasing, exploring fundamentally different or unique asset classes can be time well spent.

My securities licenses expired long ago. This is not investment advice!

Building a mass-market wealth management business for alternative investments from scratch is no easy lift. It requires extensive product innovation, entirely new distribution networks, extensive product education, significant regulatory infrastructure, along with a mainstream brand presence. The fact that alternative managers such as Blackstone (a first mover here) pursued it anyway stems from the sheer size of the “retail opportunity,” slowing inflows from institutional investors, and the ongoing pressure on the largest alternative managers to sustain strong fee revenue growth amidst public market scrutiny.

The $11 Trillion Opportunity. Total addressable market (TAM) is a term used to quantify the size of a business opportunity at some point in the future. Alternative manager KKR shared its estimates of the TAM for alternatives in individual wealth at its 2024 investor day. See figure below.

If alternatives market share were to increase to 6% of individual wealth portfolios from about 2% today, KKR estimates a TAM of $15 trillion by 2027, representing a massive increase of $11 trillion from 2022 levels. Given that the entire alternative investment industry currently has $15 trillion in assets under management, this obviously represents a colossal business opportunity. And, given the strong historical performance of alternative investments over longer time horizons, demand has existed from individual investors for a while.

Slowing Fundraising. The enormous potential of the untapped individual wealth market has existed for decades. So, what instigated the full court press by alternative managers just in the last five years? The trigger may well have been slowing inflows from traditional “bread-and-butter” institutional investors such as pension funds and insurance companies. Overall alternatives fundraising fell 13% in 2025 (per first Bain Figure below) and is down substantially from 2021 peaks as pension funds and other institutions faced full allocations to alternatives (estimated to be well over 20%) and weak distributions from existing investments.

Source: Bain & Co.

Similarly, private credit saw fundraising from institutions peak in 2021 before interest rates rose (per second Pitchbook figure below).

Source: Pitchbook

Today annual dollars raised for private credit funds remains on par with levels experienced pre-Covid, despite compelling returns, solid distributions, and (to-date) decent asset quality. Even with inflows pouring into semi-liquid funds last year, overall private credit fundraising was still flat with 2024 levels. Insurance companies, natural buyers of the private credit asset class due to above-market yields and longer duration, were large allocators to the asset class early on but flows have slowed in recent years.

Fee Revenue Momentum and Public Market Scrutiny Another reason behind the alternative manager pivot lies with the alternative investment managers being public companies themselves. It is ironic that managers whose whole business is managing private assets are themselves publicly traded entities and therefore subject to all the scrutiny and volatility that comes with being a widely followed public company.

Alternative asset managers such as Blackstone, ARES and KKR have been fantastic stocks in recent years with aggregate market cap rising as much as 4x from 2019 levels, driven by strong revenue growth. Fund management fees, these firms’ main source of revenue, grew at around 16% from 2023 to 2025, with about 30% of that growth coming from the individual wealth channel. In fact, net asset values in the private wealth channel have been growing over 35% annually since 2021 for the public alternative asset managers, supercharging growth.

Public market investors are very wary of decelerating revenue growth and alternative managers have leaned on the private wealth channel to sustain that momentum in the face of slower institutional flows broadly. Given the enormous growth opportunity of the retail market and commensurate demand from retail investors (until recently), it makes sense that they would pursue it eagerly.

ARES executive Jim Miller recently stated at an industry conference. “The secular shift from public to private is not done. It’s like runway in front of us.” This viewpoint appears to be shared by other executives in the industry as evidenced by Morgan Stanley’s decision to go ahead with the launch of a new private credit interval fund three days ago. No doubt its debut will be closely monitored.

My securities licenses expired years ago. This is not investment advice.

The ongoing maelstrom around private credit is rich with finance lessons. First and foremost, it is a powerful reminder of the importance of liquidity in the minds of individual investors. Liquidity is the ability to turn an asset back into cash as agreed and without it, investors tend to scare easily. If left unchecked, liquidity concerns can mushroom into full-blown financial crises, although that seems an unlikely outcome at this point.

Fund Fiasco. The private credit fund fiasco will no doubt make a compelling case study one day! (Note to self – write this case study!) What is all the fuss about? As initially discussed in our February 4th column about BDC’s (linkedhere), concerns about private credit lending to the software sector in the face of potential AI-disruption has only grown in recent weeks. Institutional private credit investors are fully locked up in closed-end drawdown funds and have no choice but to ride out the impending credit cycle, however rough it is. Individual (or retail) investors in BDC’s or registered evergreen funds have the option to redeem (or withdraw their investment) once per quarter up to a fund-level 5% limit, and many of them are exercising that option. See Bloomberg figure below. Alternative investment managers have had little option but to limit fund withdrawals (known as “gating”) to protect the remaining fund investors and to limit the need to fire sale fund assets to raise cash in order to meet redemptions.

The All-Important Liquidity Premium. What is most surprising to me about the media coverage of private credit redemptions is the absence of discussion about the liquidity premium as it relates to alternative investing. When an investor gives up access to their money for some period (i.e. surrenders liquidity), he/she expects to receive something in return, aka a liquidity premium.

Imagine that you are looking to deposit $10,000 in your local bank. With no plans to spend the money in the foreseeable future, you are choosing between a daily-liquid savings account with a 0.5% interest rate and an 18-month Certificate of Deposit (aka a CD) with a meaningfully higher interest rate of 4.5%. Which do you choose? If all you cared about was yield this is an easy decision, but it’s not. The CD requires that you contractually give up access to the $10,000 for 18 months and many investors are reluctant to do this, even when incented with an extra 4% yield (the liquidity premium in this example).

Most alternative investments such as private equity, real estate or private credit, involve buying assets that require giving up liquidity for an indeterminate period, but almost always for several YEARS. Investing in ownership stakes in companies (e.g. private equity), buying real assets such as data centers (e.g. infrastructure investing), or making long-term loans to companies (e.g. private credit) involves a lot of uncertainty around when an investment can be exited and at what price. As a result, alternative investors aim to negotiate a liquidity discount, or a lower price at the outset. A cheaper entry price helps manifest a liquidity premium in the future.

Finding the Right Investment Vehicle. Given the highly illiquid nature of alternative investments generally, private investing has traditionally been done only via closed-end or “drawdown” funds that require investors to give up liquidity for ten years or more. The duration of the investor lockups and the assets they manage is matched by design.

As such, the recent marketing of investment products structured as “semi-liquid” to individual investors as an effective way to invest in private credit is perplexing at best. As discussed, the whole mechanism by which alternatives generate higher returns hinges on giving up liquidity!! In this context, the idea that individual investors could reap the return benefits of alternatives without commensurately giving up liquidity seems rather surprising.

Bob Long, CEO of StepStone Private Wealth put it well last week in an interview with Bloomberg. “We want investors that understand we are not alchemists. We cannot magically deliver to you all of the illiquidity premium of private assets and also provide you liquidity under all circumstances,” Long said.

Retail Investors Still Want Alts. The desire of individual investors to diversify away from the tech-dominated public stock market into private assets remains very real. However, their desire to invest in sub-optimally designed, high-fee alternative investment vehicles is not. If retail investors want the superior returns and diversification of alternative investments why wouldn’t the industry offer them similar products that institutions use? Probably because most would balk at giving up liquidity for ten years or more. See figure below from the KKR Retail Investor Advisor Survey (from October 2025) on why retail investors are interested in private market investments.

Given the importance of the individual investor to the future growth of alternative investments, we anticipate the industry to re-evaluate the liquidity structure of the investment vehicles that are offered to retail customers. The current redemption fiasco suggests it may be time to come up with a better alternative.

This is not investment advice.

Bloomberg recently reported that Space X is seeking to raise $50 billion at a valuation around $1.75 trillion as early as this summer, potentially making this deal the largest IPO ever. Any of these deals, if successful, could be enough to pry open the so-called “IPO window” and entice a long list of private-equity backed companies to test the waters in public markets.

Prying Open the IPO Window The ability for companies to transform from privately held to publicly traded in an initial public offering (aka IPO) has historically been a coveted rite of passage for any company. A successful IPO brings fresh capital for growth, higher brand visibility, and typically generates a financial windfall for founders and early investors. Consider the success of Coreweave, an AI-related company that IPO’d in March 2025, raising $1.5 billion in fresh new capital and garnering the company a $23 billion valuation. Coreweave shares have since surged over 85% as demand for the company’s AI-related infrastructure has exploded.

Despite recent market volatility, investment bankers maintain that the IPO window can open to companies with the right combination of scale, growth and profitability (and presumably an AI-forward strategy)! The hope is that a few splashy and well-received public debuts will prompt other unicorns to take the plunge into liquid public markets, and there sure are a lot of them. As we discussed in our recent column on venture capital (Iinked here), there are now 1,705 unicorns in the world with a cumulative valuation of a whopping $8.4 trillion globally (per Crunchbase).

The Patient Hands of Growth Equity. Why are these companies staying private? The most compelling reason involves a private equity investment strategy known as growth equity, which targets investments in high-growth companies, and which has made private markets bigger and more liquid than ever before. In 2025, six companies alone raised $94 billion in fresh growth equity including Open AI ($40 billion) and Anthropic ($28billion), per Rothschild and Co. Total growth equity capital deployed in 2025 topped $234 billion, more than double 2024 totals and well above what was raised in the IPO market. Beyond just growth equity-focused funds, new entrants including hedge funds, sovereign wealth funds, and family offices have become investors in fast-growing private businesses (usually in the tech-sector) as more valuation creation takes place there.

How Does Growth Equity Work? Growth equity involves taking minority stakes in private companies that are looking to scale up their business and have an already fast-growing top line. Unlike venture capital, which targets companies that are still developing their product or service and are almost always pre-profit (high fail rates), growth equity targets companies that have proven products /services and a clear path to profitability.

“Growth equity allows founders to pursue stage two of business expansion or exploration” said Mike Goodman, co-founder and senior managing director of Pharus, an advisory firm specializing in growth companies within the technology sector. Moreover, growth equity allows founders to take some money out of the business by selling a larger share of their ownership to fund investors while remaining in control. “It also allows founders to de-risk by taking chips off the table, while still remaining invested for a second bite at the apple” added Goodman.

On the spectrum of private equity strategies, growth equity sits in between venture capital and leveraged buyout (LBO). See figure below.

Like other private equity strategies, growth equity investing is done via closed-end funds (usually with a 10yr life), so these ownership stakes are designed to be temporary (4-7yrs is standard). Growth investors eventually need to exit these stakes either via acquisition of the portfolio company, or an IPO. IPO markets haven’t cooperated the last few years.

Beyond capital, staying private allows founders to control who their investors are and to avoid costly regulatory burdens. Another significant impediment to seeking a public listing may be that private market valuations have been slower to reset lower due to higher interest rates, suggesting that a public listing may not bring the typical peak valuation founders have come to expect. Notably, most of the IPOs in 2025 came at lower-than-peak valuations. See Figure from Pitchbook below.

Whether a bellwether unicorn can successfully navigate the transition to public markets will be closely watched. Nevertheless, success at the mega-cap end of the market may not imply a green light for all PE-backed private companies, particularly those in the software sector, which was reportedly 25% of the IPO pipeline coming into this year. Bankers can only dream of a wide-open IPO window, but it could be a magical thing indeed.

This is not investment advice.

Bain & Co. issued its annual private equity outlook for 2026 over the weekend, providing an excellent lay of the land for the PE industry today (linked here). Bain’s report is a powerful reminder of the size and importance of private equity today. Buyout funds have raised a remarkable $1.8 trillion in capital since 2022 and still have $1.3 trillion of “dry powder,” or committed capital waiting to be invested! Beyond this, companies under PE ownership now account for about 7% of US GDP!

Deal activity (PE firms buying portfolio companies) jumped to $904 billion in 2025, up 44% from 2024 levels driven by several enormous leveraged buyouts, including the megadeal for gaming company Electronic Arts. All-important “exit” activity (PE firms selling or IPO’ing portfolio companies) rose 47% from very low levels to $717 billion in 2025. See figures below.

Source: Bain & Co. Dealogic

Source: Bain & Co. Dealogic

PE Industry Outlook Measured. For a global PE firm, Bain’s 2026 outlook report struck a surprisingly cautious tone. Why? Firstly, private equity returns trailed public stock markets for the third year in a row in 2025 (as measured by internal rate of return or IRR). US buyout funds now lag public stock markets over five- and ten-year time horizons (see Bain’s figure below). Notably, PE still bests public market benchmarks over a 20yr time horizon, arguing long term investors in the asset class have been rewarded.

Source: Bain & Co. MSCI.

Weaker returns in recent years stem from a few factors. First, interest rates are higher today vs. when most portfolio companies were bought (on average five years ago), which is hampering company valuations. Second, both acquisition and IPO activity have been muted the last few years, which is limiting exit options and values for portfolio companies. Money flows tend to follow performance in the investment business and so private equity fundraising is slowing. Fundraising dollars fell 16% to just under $400 billion in 2025.

Exit Congestion The other issue facing the PE industry today is the vast unsold inventory of portfolio companies that need to be “exited” (i.e. sold or IPO’d). As discussed in our first Substack on private equity (linked here), PE firms utilize closed-end funds with finite lives, usually ten years, to execute their strategy of buying companies with leverage and improving their value by raising profitability. As investments mature and portfolio companies increase in value, GP’s move to “exit” these investments and generate distributions, i.e. realized gains/cash payments back to fund investors (known as limited partners or LP’s).

Lower Distributions = Lower Fundraising Currently there are 19,000 unsold portfolio companies worth a remarkable $3.8 trillion sitting in private equity closed-end funds. Even with IPO and acquisition markets looking up, Bain & Co. believes that activity remains well below levels necessary to support a timely exit of this backlog before funds reach the end of their lives, which could further pressure GP’s. Distributions as a percentage of net asset value have been less than 14% now for four years, well below industry averages. This dynamic further depresses fundraising as many fund investors/LPs rely on cash distributions from existing funds to invest in new PE fund offerings. This distribution/fundraising dynamic is illustrated in my diagram below. If an existing PE investment (e.g. Vintage 2020) is returning half as much cash each year as anticipated, there is half as much cash to reinvest in the new fund that is fundraising (e.g. Vintage 2026).

PE firms have the capacity to rise to the challenge posed by clogged exit markets, and they are certainly motivated to do so given the knock-on effects on fundraising. Indeed, many GPs are pursuing alternative methods to return capital such as continuation funds, dividend recapitalizations and selling portfolio companies to other sponsors (which we will explain in future columns). Time will tell if GP’s will get a bigger assist from acquisition activity and IPO markets in 2026.

This is not investment advice.

This time, however, it appears that many hedge funds were caught off guard. According to the Bloomberg article linked here, fundamental and quantitative hedge funds suffered their worst single-day performance in years last week, due mainly to a break down in the popular quantitative strategy of momentum investing (involving buying winners and selling losers). Worse yet, many hedge funds are likely “de-grossing,” – a painful dynamic I will explain in a moment.

But First, Let’s Talk Shorting Mechanics.

Many observers assume that because hedge funds can short stocks that they are short the market overall, but this is rarely the case. Hedge funds tend to lean long or short in aggregate but generally don’t carry a lot of market (known as beta) risk one way or another. Every long (or ownership) position is typically closely hedged by a short position in stock or another security.

How does shorting work? To short a stock, one first needs to borrow it from a broker. Hedge funds borrow stock from investment banks known as prime brokers, who also offer them leverage (borrowing capacity), securities for shorting, custody and some risk management services.

Consider the following example: as a hedge fund manager I own stock in FedEx and want to hedge that long position by shorting its close competitor, UPS. To execute the trade I first borrow 1,000 shares of UPS from my prime broker. I then immediately sell the shares at the current market price of $120, generating cash proceeds of $120,000. I use some of the proceeds to post some cash “collateral” with the prime broker in case the trade moves against me. See figure below.

Once UPS reaches my downside target (e.g. $110), I buy back the 1,000 UPS shares in the open market (known as “covering”) and return them to the prime broker to close out the trade. In this example trade, I generate a profit of $10,000 ($120 shorting price minus $110 cover price = $10 * 1,000 shares).

Shorting is Risky and Levered. Clearly this example trade worked, but shorting is a risky endeavor. With any long position the maximum downside is the stock going to zero. With any short position the maximum downside (caused by the stock increasing) is technically infinity!

If UPS stock rose substantially, say to $140 from $120, I would likely get a margin call from my prime broker who lent me the shares. Prime brokers require a certain amount of cash collateral to be maintained against any shares borrowed. Depending on the size of the margin call, I may need to downsize this position or cover at $140 to generate enough cash to post additional collateral. Due to the levered nature of shorting, it’s easy to see how it can quickly become painful when trades move adversely, particularly if trades are crowded (i.e. a lot of hedge funds are in similar trades).

Which Brings Us to “De-Grossing”

Just the mention of the word “de-grossing” sends a shudder down my spine and likely for any hedge fund manager. Most funds run with tight risk limits, particularly the large “multi-strategy” ones. This is understandable as hedge funds run levered portfolios (use borrowed money) to amplify returns.

When trades move the wrong way and margin calls occur, hedge funds typically move into damage control mode, raising cash and limiting further losses by downsizing/unwinding positions and reducing overall fund leverage, known as “de-grossing.” Widespread de-grossing can become a vicious cycle, amplifying losses, triggering “short squeezes” (huge rallies in a heavily shorted stocks) and generating even more volatility due to indiscriminate selling (low) and covering (high). See figure below.

Fortunately, last week’s de-grossing episode appeared to end quickly, and hedge funds are still up on the year (according to Bloomberg). Broadly speaking, hedge funds should be well positioned to manage volatile markets. AI-disruption fears are now ravaging the stocks and bonds of a variety of industry sectors, generating no end of lucrative arbitrage opportunities for them to explore.

This is not investment advice.

Cockroach Sightings. The first jolt came from Blackrock TCP Capital, a publicly traded BDC managed by asset management giant Blackrock. TCP announced a sizable 19% write down of Net Asset Value (known as NAV) due to credit impairments (i.e. future anticipated losses) on loans to six different middle market companies. The news sent its shares down about 15% on the week to levels 50% lower than a year ago (ticker TCPC).

Investors Get Flighty. The second announcement related to extremely large redemptions (aka withdrawal requests) at Blue Owl Technology Income Corp., an unlisted tech-focused BDC managed by private credit firm Blue Owl. Notably, this fund is not experiencing any credit issues and shows strong relative performance. However, many investors decided that headlines surrounding potential AI-related dislocation within the technology sector could impact credit quality in the future. Blue Owl shares have been under pressure ever since.

BD-what?? Most non-bank lending to business (aka private credit) is made from long term private closed-end funds (explained in detail in our first column linked here). Investors in these traditional private credit funds give up access to their capital for up to ten years, usually in exchange for above-market yields and lower than average volatility. Investor lockups are matched with loan maturities by design. However, there are other ways to invest in private credit assets with juicy yields, including via a BDC.

BDC’s were created by Congress in 1980 to promote lending to middle market companies and today manage more than $400 billion of assets. Anyone can buy these registered closed-end funds. They come in two flavors: non-traded (with limited transparency and redemption windows) or publicly traded. Either way they offer access to a popular alternative investment strategy with materially more liquidity than a typical private credit fund. Unsurprisingly, BDC’s have grown rapidly (see figure below). They offer yields of just under 10% today (per Morgan Stanley).

Like traditional private credit funds, BDC’s also use leverage (i.e. borrow money) to boost assets and returns. Every quarter BDC’s need to provide investors with a net asset value for transparency and for redeeming shares. As a result, the carrying value or “marks” on their assets (the loans they make) takes on a much greater significance than in a traditional private credit investment vehicle where investors are locked up for the duration.

TPC’s Markdowns. By any measure, a 19% write down of any lender’s asset value is stunningly large. Consider that loss rates for bank commercial lending run around 1% and in private credit run around 1.5% through a cycle. If TPC was a bank it could well be insolvent by now. Fortunately, BDC’s carry higher capital ratios than banks.

A Broader Problem? Importantly, none of TCP’s problematic exposures appear to be shared by any other publicly traded BDC’s, suggesting that this fund is just a very poor underwriter. Unfortunately, the TPC episode reinforced the market’s nagging fear about private credit – which is that problematic loans are valued at 100 cents on the dollar (known as ‘par’) until efforts to keep the loans performing have been exhausted. Once the lender accepts that the loan is not going to repay in full, it is suddenly worth much, much less and gets abruptly written down to estimated recovery value. The most jolting recent example of this is Blackrock’s write down of loans made to Renovo Home Partners from 100 cents on the dollar to zero cents on the dollar in one fell swoop!

“The only good loan is one that gets paid back.”
- Robert Wilmers, Former Chairman and CEO of M&T Bank

Investor Flight Risk. The TPC episode also illustrates the structural risks of using more liquid investment vehicles to fund longer term illiquid assets. Loans are marked at par until they are not, which is why investors can get flighty, and that can ruin it for everyone. The lagged process of marking down loans incentivizes exiting these investments as soon as there is a whiff of trouble or expectations of mark downs ahead. Just ask Blue Owl. This week their technology fund announced redemptions of 17% in one quarter! Despite the fund’s strong performance to date, investors are fretting over potential credit weakness in technology. Normally, such redemption requests are capped at 5% but Blue Owl chose to honor all of them to avoid further investor unrest! Uncontrolled redemptions could trigger forced selling of assets, making Owl’s move somewhat understandable. Rather than sell assets to meet redemptions, the BDC chose to increase borrowings to meet redemption requests, increasing fund leverage.

Where are We Headed? Most experts believe that TPC is an example of a poorly run BDC and not suggestive of a near term broad-based deterioration in credit quality. Indeed, default trends have been improving in recent quarters. That said, defaults are decently high and are expected to normalize into 2026, driven not so much from a weakening economy but from prior loan restructurings and AI-driven disruption within technology and commerce. Time will tell.

The episode with BDC’s reminds us that when retail investors get spooked, they tend to exit stage left. As such these episodes are a feature not a bug of private market investing when retail investors are involved.

This is not investment advice.

The convergence between traditional and alternative investments is no secret, but the last place I ever expected to see private equity being advertised would be Vanguard Investments. Vanguard founder John “Jack” Bogle built his firm by pioneering low-cost, highly liquid, index investing. His firm ignited the most powerful investment trend of the last twenty years, the shift from actively managed mutual funds to passively managed Exchange Traded Funds (ETFs). Along the way Vanguard became an asset management juggernaut with over $11 trillion in assets under management, the 2nd largest in the country. I wondered what the late Jack Bogle would think if he saw this banner ad! Was he spinning in his grave right now?

Public to Private Market Sea Change Underway. The shift from active mutual fund investing to passive/index investing defined the last twenty years in the asset management industry. Will the shift from traditional public market investing to alternative private market investing define the next? It certainly looks likely. Why? With the number of publicly traded companies shrinking fast and public stock indexes increasingly dominated by giant “mega-cap” technology companies, many have called to “democratize” access to private market investments such as private equity, private credit and venture capital in the name of diversification. Indeed, 85% of all large companies today are now in private hands according to Goldman Sachs, a remarkable statistic. (See Figure below from Bloomberg) More importantly, a recent survey by CAIS suggests that almost 50% of retail investors are now interested in alternatives and 25% are actively considering them!

Asset Managers Venture Forth Together. It appears that neither asset managers nor investors are waiting around for any legal or regulatory change before positioning themselves to ‘go retail.’ They know that almost 50% of global wealth is held by individual investors. Even a small share of this wealth means huge inflows. Traditional and alternative asset managers eager to be first movers have begun teaming up to develop and launch investment products that blend private investments into a variety of investment vehicles for retail investors, including “target date funds” that are used in 401(k) retirement accounts and so-called “Evergreen” funds that offer private market investments in “semi-liquid” accounts with lower minimums.

In fact, in 2024 there were a record number of strategic acquisitions between traditional and alternative asset managers (63 deals per Bain & Company), the largest of which was Blackrock (the world’s largest traditional asset manager) buying HPS (a large private credit firm). Further, numerous partnerships between traditional and alternative managers were forged last year, including between Apollo Inc. (a large alt manager) and State Street Investment Management (a large ETF provider), between KKR ( a large alt manager) and Capital Group (a large retirement manager), and a three-way venture between Blackstone (the world’s largest alt manager), Wellington (an active asset manager) and Vanguard Investments! Notably, most of these joint ventures involve large players in the massive ($12.5 trillion) 401(k) market. Vanguard Investments controls 40% of the market for “target-date” retirement funds, most often cited as the preferred vehicle for delivering private investments into retirement accounts.

The Horizon Looks “Evergreen.” Starting around 2020, alternative managers introduced innovative “semi-liquid” fund structures that allow non-accredited investors into private markets. These registered funds mostly offer investments in private credit and real estate assets, but most all these funds have lower investment minimums, periodic redemption opportunities (subject to limits), incentive/management fee structures, and simplified tax reporting. These funds have sold like hot cakes through the registered investment advisor (RIA) and financial advisor communities in the name of diversification, which is a powerful theme in today’s tech-dominated public markets. Assets under management in these registered funds topped $500 billion in 2025 and growth shows no sign of slowing with almost 100 new funds introduced in 2025, including some private equity funds. We will discuss these unique funds in more detail in future columns, but no doubt they are here to stay.

Visibility Might Be Limited on this Voyage into Private Markets. It will be interesting to see whether the “democratization” of private markets will be accompanied by “democratized” disclosure rules or investor protections. Retail investors are very familiar with investments that are highly liquid (can be sold at least daily), have transparent and objective valuations (using market-based inputs), and a clear fee structure (e.g. a 0.10% management fee for a Vanguard Index fund).

Private market investments operate entirely differently, mainly because they have only been open to sophisticated institutional or high net worth investors. As discussed in previous columns, private investments are long-dated investments in whole companies (LBO investing), whole loans to companies (private credit), equity stakes in real estate, and minority stakes in start-ups (venture capital) that only become liquid once these investments mature and are exited. Successful private market investing takes years, and in the interim private investors rely on subjective internal models to track value. Fee structures, discussed in our recent column here ( fee column) are complex, burdensome, and dynamic based on performance.

The Shifting Regulatory Landscape. In August 2025, President Trump signed an executive order proclaiming that “Americans should have access to retirement funds that include investments in alternative assets,” and directed the Department of Labor to revise rules to encourage retirement accounts such as 401(k)s to include private investments. These new rules are expected to be revealed in the next few months. In December 2025, the US House of Representatives passed the Incentivizing new Ventures and Economic Strength Through Capital Formation Act (INVEST). This law encourages updating securities laws to allow investors better access to private markets. The Senate has yet to take up this law, however. Beyond this, the share of US households already qualifying as “accredited investors” (and thus able to participate in alternative investments) rose to 22% in 2022 and is on track to hit 30% by 2030 (per JP Morgan).

Regulatory change will likely augment the convergence of public and private markets with improved accessibility for retail investors. In fact, Bain & Co. estimates that 25% of all asset growth for global alternatives will come from individual private wealth (retail investors with $1-30mm in assets) over the next ten years. And given the size and power of mass market investing, it could entirely change the industry’s priorities.

I never did learn what potential private equity investment Vanguard wanted me to consider, but something tells me I will see a similar banner ad again very soon!

It turns out that 2025 was also quite a good year for hedge funds broadly. Returns (net of management and performance fees!) were 12.6% according to the Hedge Fund Research Institute (HFR) weighted index, representing the industry’s strongest annual gain in sixteen years and among the five best return years ever! And while there is some positive selection in the data, it’s safe to say 2025 was a lucrative one for the industry.

You might observe that a 12.6% return isn’t particularly impressive relative to the S&P 500 Index (up about 16% in 2025 and an average of 13% over the last five years) and indeed it isn’t. But beating equity benchmarks really isn’t the point of a hedge fund investment. So, what exactly is the point?

All-weather returns. Hedge funds are a little like all-weather tires on your car; tires that should grip the road regardless of the weather. Hedge funds target positive absolute returns regardless of economic or financial market performance.

Hedge funds invest in publicly traded financial instruments but through their unique approach to investing, they seek to create gains regardless of whether stocks rise or fall, interest rates rise or fall, or whether currency and commodity markets fluctuate wildly. In industry parlance, hedge funds target returns that are not correlated with broader markets and traditional investments. As such, hedge funds offer investors much needed diversification.

Source: Bloomberg News. Link to article

How do hedge funds create all-weather returns? Arbitrage. Hedge funds employ investment methods that are very different from the “buy-and-hold” strategies used in traditional investing. Instead, hedge funds rely heavily on an investment concept known as arbitrage, which aims to exploit market inefficiencies or abnormalities. In practice, arbitrage involves simultaneously buying and selling the same or similar financial instruments in different markets (i.e. different geographies, exchanges, currencies, security markets) to profit from price or valuation differences.

That definition of arbitrage is quite a mouthful, so consider a simplified example: imagine that one observes price quotes for shares of Apple stock (ticker AAPL) and discovers a discrepancy in the quoted prices on different exchanges. Let’s say AAPL is offered at $260 per share on the Nasdaq stock exchange in New York and at $258 per ADR (American Depository Receipt) share on the Tokyo Stock Exchange in Japan. The trade here is obvious for the individual investor who is looking to buy and hold Apple stock: just buy the cheaper shares at $258 in Tokyo. An arbitrager at a hedge fund would buy as many AAPL shares as possible in Tokyo at $258, immediately sell them on the Nasdaq at $260, and earn the $2 per share price difference until the quoted prices eventually converged. Better yet, an arbitrager would use some borrowed money to buy the Tokyo-listed AAPL shares to juice the profit! This risk-free trade is known as simple arbitrage.

In today’s high speed and highly efficient markets such obvious price discrepancies are rare. Glaring price abnormalities are typically quickly identified by computers and exploited by arbitragers/hedge funds. Today, most arbitrage trades involve risk, where the convergence of the financial instruments that are simultaneously being bought and sold is not a sure thing. Common risk arbitrage strategies employed by hedge funds today include merger arbitrage (which includes buying and selling the stocks involved in mergers and acquisitions) equity long/short trading (which involves buying and selling/shorting highly correlated stocks against each other in the hopes of convergence – think Home Depot vs. Lowe’s), and convertible bond arbitrage.

Hedge fund traders can typically be found in every corner of the capital markets, often the most obscure and the most volatile. Notably, the more volatile the market, typically the more fertile the ground is for market inefficiencies that can be exploited or arbitraged. In this context, it’s easier to see why this past year (with its tariff and AI-related volatility) was such a good year for the industry.

Hedge funds utilize every financial instrument imaginable, including stocks, bonds, interest rates, currencies, and commodities. Furthermore, hedge funds utilize derivatives on those financial instruments such as futures, options and swaps. As a result, hedge funds are rather difficult to categorize and compare, but we will try!

“Quant” vs. Fundamental Funds. Some hedge funds rely on complex factor-driven models and algorithms to find and exploit arbitrage opportunities. These funds are typically referred to as “quantitative” hedge funds or “quant” funds, the most well-known being Renaissance Technologies, AQR Capital Management, and D.E. Shaw and Co. For these funds, the models dictate the trades. Other fund managers rely on traditional financial analysis to find arbitrage opportunities like building cash flow models, analyzing macroeconomic and geopolitical factors, and meeting with company managements. These hedge funds, which rely primarily on human judgement to make trades, are collectively referred to as fundamental hedge funds, the most well-known being Millennium, Citadel, Pershing Square Capital Management, and Viking Global Investors.

Approachable Fund Structures. Hedge funds are arguably the most liquid alternative investment vehicle due to their open-ended structure. Unlike private equity, private credit and venture capital, hedge funds are structured to remain ‘open’ indefinitely to new investor money and for periodic outflows. As such, hedge funds grow with investor inflows and shrink with investor withdrawals. Outflows, however, are tempered by the fact that most hedge funds offer periodic liquidity (usually every quarter) after an initial “lock-up” period (usually 6-12 months). That said, most investors in hedge funds have a long-term investment horizon. Top performing funds often close to new investors after reaching a targeted size due to the difficulty of scaling up arbitrage strategies. Large funds currently closed to new investors are Renaissance, Citadel and Millennium.

To achieve uncorrelated returns, most hedge funds actually avoid taking traditional market risks (known as beta risk). As such, comparing their results to broader market indexes is a little unfair. That said, consistently underperforming other investment options doesn’t tend to drum up new investors and bring in new money! The volatility brought on by recent geopolitics, tariff uncertainty and the AI boom was a boon for the hedge fund industry this past year. Will 2026 bring such fertile conditions for arbitrageurs? Only time will tell.

This is not investment advice.

Indeed, the 2025 Barrons 400 list of the nation’s wealthiest individuals includes ten hedge fund executives, eight private equity executives, three private credit executives and one venture capital executive. Why is the alternative investment industry able to turn out so many billionaires? What is it about the fee structures and compensation structures for alternative investments that is different? This column aims to answer those questions.

Alternative Investments Fee Structures De-Mystified. Both traditional and alternative money managers charge their investors an annual management fee, which is a simple percentage of the dollar amount managed for each investor. For example, a $1,000,000 equity mutual fund investment with Fidelity Investments is likely to incur around a $5,000 annual management fee, representing 0.50% of assets managed. Management fees are charged annually regardless of investment performance and are used to pay salaries and operating costs at the investment firm. If the mutual fund investment gains 10% in a year, the investor’s return net of fees is still 9.5% (10% less the 0.50% fee). See Exhibit below.

Alternative investment vehicles operate with a unique, two-part fee structure. Alternatives chargemanagement fees (which tend to be much higher than traditional investments) but also take a percentage of the gains they produce each year, known as performance fees, incentive fees or carried interest, aka ”carry.” Consider a $1,000,000 investment at a hedge fund that charges a 2% management fee and a 20% performance fee (the industry standard). If the hedge fund realizes a 10% return during the year, the investment would incur a $20,000 management fee (2% *$1,000,000 = $20,000) and approximately a $20,000 performance fee (a 10% gain on a $1,000,000 investment generates $100,000, of which the hedge fund gets a 20% cut. 20% of $100,000 = $20,000). As such, the hedge fund collects total fees of $40,000, or 4% of the assets managed. The hedge fund investor’s 10% return is lowered to around 6% once fees are charged! Compared to the 9.5% return on the mutual fund investment the difference that fees make becomes very apparent.

Notably, many alternative investment funds only charge incentive fees over and above a hurdle rate of return (usually 6-8%). As such, incentive fees only get charged once the targeted return has been reached. In fact, most all LBO/private equity, private credit, and venture capital firms operate with hurdle rates. Further, for these strategies incentive fees are only charged on realized gains and after original capital has been returned to investors (aka limited partners). Alternatives that use closed-end fund structures (funds with a finite life such as 10yrs) also reduce management fees somewhat in the later years of the fund as investments mature. Some hedge funds utilize hurdle rates and some do not. Typical fee structures of various traditional and alternative funds are listed in the table below.

Where do these high fees go? Typically, management fees are used to fund operating expenses and support costs at the investment manager. Meanwhile, annual performance fees are used to directly compensate portfolio managers and investment professionals who manage investor money. In years when they don’t generate returns for investors, portfolio managers don’t get a bonus. Conversely, high return years or high return funds can lead to enormous payouts, particularly at those managing large dollar amounts.

This incentive-heavy fee structure can be viewed as a blessing and curse. Alternative investment firms attract the best and the brightest minds. Investment professionals are strongly motivated to generate the highest possible returns as they participate in the upside. However, achieving high absolute returns for investors is difficult when performance fees reduce returns so much, as illustrated by the example above. Notably, as fund sizes increase the ability to generate high returns is typically harder. Further, with larger funds throwing off higher management fee dollars, the motivation to generate outsized gains becomes less powerful. Consider that private equity firm Thoma Bravo raised a $24.3 billion technology-focused closed-end buyout fund in 2025 (called Thoma Bravo XVI). Assuming a 2% management fee would suggest fees of $486,000,000 each year before any gains or incentive fees are earned! According to publicly available information, Thoma Bravo has less than 250 employees and this is one of several funds they manage!

Highly respected venture capital investor Bill Gurley (Benchmark Capital) has been openly critical of the large funds being raised today in venture capital, stating that “The only type of return that’s guaranteed is excessive [management] fee income. You get that, no matter what, which is a conflict for sure.”

Performance fees are powerful motivators (I can speak from my hedge fund experience here), but also a major encumbrance on returns to investors. We will examine the investment performance of various alternative investment strategies in future columns, but their unique fee structures need to be better understood and can be viewed a double-edged sword.

This is not investment advice.

At a time when most alternative investors are focused on venture investing in AI or earning outsized yields in private credit, the massive Electronic Arts deal was a reminder that this type of private equity investing is still relevant. While big splashy LBO’s are rarer today, they are the original alternative investment strategy. Pioneered by Jerome Kohlberg Jr., Henry Kravis and George Roberts (co-founders of the firm KKR) in the 1970s, the leveraged buyout burst onto the financial scene in the 1980’s. KKR’s 1989 takeover of tobacco and food conglomerate RJR Nabisco made for high drama and is the subject of a wonderful book called “Barbarians at the Gate” (also a movie). During this period, LBO bankers were dubbed “corporate raiders” due to their penchant for cutting costs in the name of shareholder value.

LBO’s explained. Think of an LBO as buying a fixer-upper house as an investment property in the hopes that it can be sold for a tidy profit a few years later, after renovations are complete. The best house “flippers” look for a house with potential, have a vision for how to make it look more appealing to a buyer (new bathrooms, etc.), buy the home with a mortgage (borrowing against the value of the home up to 80%), and then spend a year or so fixing it up for sale. In the ideal scenario, the selling price handily exceeds the purchase price, which pays off the mortgage and leaves a nice profit. Leveraged buyouts are like house-flipping with companies instead of houses! Private equity firms such as KKR, look for public companies that are good businesses but need restructuring or a strategic overhaul, buy them out using investor equity and a lot of borrowed money (often 30-60% of the purchase price), take several years to implement operational improvements and increase profitability, and then “exit” by selling the company to a strategic buyer or re-selling shares to the public. Cash proceeds from the “exit” pay down any extra borrowings and leaves the sponsor with any profits. Gains are then distributed back to the PE firm’s investors (limited partners).

Like venture capital investing, LBO investing takes years, so private equity firms (known as general partners or sponsors) use a closed-end fund structure (discussed in our first column). Patient investors such as pension funds, foundations, and sovereign wealth funds commit capital to a fund for a specific time (usually ten years), agreeing to have their capital drawn down over time as buyout opportunities emerge, and typically receive gains in the later years of the fund. (See Exhibit below)

What makes LBO investing challenging is the need to balance the sponsor’s short-term profit and growth goals growth for the portfolio company with that company’s longer-term best interests. The sponsor is heavily incented to make the turnaround company look as good as possible around the time of exit, and less worried about what happens once their investment is exited.

When executed well, the LBO strategy produces strong investment returns, but with so much investor money chasing a finite number of potential turnarounds/companies over the last forty years, much of the low hanging fruit has been picked. Moreover, the industry today is grappling with a large backlog of investments that still need to be exited via acquisition or re-IPO amidst weaker capital market activity. For these reasons, the money flowing into LBO investing has subsided in recent years. See Figure below.

Source: Pitchbook. As of September 30^th, 2025

Electronic Arts. In September 2025, two private equity firms, Silver Lake and Affinity Partners, and one sovereign wealth fund, Saudi Arabia’s Investment Fund, teamed up to buy gaming giant Electronic Arts (EA) for approximately $55 billion, at about a 25% premium to EA’s stock price. The deal was a bit of a surprise to industry observers as EA was not viewed as strategically or operationally challenged, but the LBO could allow the firm to pursue riskier longer-term bets into AI-driven gaming.

Investment bank J.P. Morgan agreed to arrange $20 billion of financing for the deal, suggesting a high degree of leverage (borrowing) by historical standards. That JP Morgan agreed to lead the financing rather than a private credit firm is also notable, as private credit firms are averaging over 60% market share in financing LBO transactions (per Prequin). Recent regulatory relief for banks of rules around leveraged lending suggests banks will be more involved in leveraged finance going forward. Interestingly, recent regulatory fillings reveal that the Saudi Arabia Investment Fund is slated to own over 93% of Electronic Arts once this deal closes, with Silver Lake at 5.5% and Affinity Partners at only 1.1%.

Private equity firms gobbling up publicly traded targets for LBO’s is another reason the number of public traded stocks has dwindled over the last ten years. In fact, more money is invested in LBO investing than any other alternative investment strategy, with assets under management totaling close to $6 trillion, per Prequin. That trend is likely to abate in the next ten as fundraising into private equity slows. LBO investing is no longer the mainstay within alternative investing but will always be its foundation.

This is not investment advice!

Historically, selling stock to the public in an initial public offering was the crowning achievement for any growing company (and Goldman’s bread and butter business). An IPO brought fresh capital for growth, along with visibility and legitimacy. Further, it typically generated immense wealth for the business founders. Today, companies are staying private much longer, aided by a steady stream of private capital flowing from venture capitalists, private equity firms, corporate backers, celebrities, and family offices. Today is the era of the unicorn.

Unicorns are privately held companies with a valuation of greater than $1 billion. Historically a rare sighting, there are now 1,643 unicorns in the world with a cumulative valuation of a whopping $7 trillion, according to Crunchbase. By comparison, there are 4,572 public companies globally with a valuation of approximately $140 trillion (per the World Bank and Siblis research). The largest unicorns today, OpenAI, SpaceX, and Stripe rival many of the largest publicly traded companies in size. (See table below) So far this year, unicorn companies have raised almost $200 billion in capital globally, almost double the $110 billion raised in the public IPO market. (See chart below) In this context, CEO Solomon’s nod to private capital makes more sense.

Source: Crunchbase. As of December 15, 2025.

How did we get here? Venture capital (initially dubbed “adventure capital”) was born in Silicon Valley in the 1950’s with the birth of Fairchild Semiconductor (one of America’s first chip companies). For decades, a clubby group of Silicon Valley-based partnerships have raised pools of long-term money from large institutional investors such as pension funds and endowments in closed end fund structures (discussed in my first column). Typically, venture capitalists raise 10-yr funds and invest in non-controlling (known as minority) ownership positions in promising start-ups in the hopes that one or more becomes the next Amazon. VC’s nurture their start-ups, offering strategic advice to founders, along with networking advice and employee recruiting. Investments are “exited” in the fund’s later years as the start-ups mature and are sold to other companies, raise money in a public offering (i.e. an IPO), or shut down. Any cash generated by these exits are distributed back to the fund investors before the end of the fund’s life. Despite compelling long-term returns, VC is structurally very risky. Statistics suggest that over two-thirds of start-ups fail and a very small number of investments are responsible for the lion’s share of venture capital gains. Respected venture capitalist Marc Andreessen has stated that, in general, 97% of venture capital returns in any given year come from 15 investments out of thousands that receive funding.

After picking up the pieces of the dot-com bubble, venture capital experienced breathtaking growth over the last 15 years. With interest rates low and technology evolving rapidly, returns soared. That success did not go unnoticed. Around 2019, Silicon Valley’s traditional VC’s began to have competition at the negotiating table. First, larger private equity companies such as Blackstone and KKR began to offer “growth equity” to more mature start-up companies in the hopes of getting returns before they tapped public markets. Technology companies such as Microsoft and Google Ventures began to offer capital to startups with emerging technologies that looked promising. Finally, celebrities and family offices began to get involved in startup investing. Consider private nonalcoholic beer brewer Athletic Brew as an example. Just shy of unicorn status, Athletic Brew has a valuation of $800mm, and investors include General Atlantic (a growth-focused private equity firm), Keurig Dr. Pepper (a competing beverage company), TRB Advisors (a family office), Alliance Consumer Products, JJ Watt, Karlie Kloss, David Chen and Naomi Osaka!

Private companies aren’t complaining either. Founders can control who can invest, can negotiate terms of investment, and operate without the transparency and extra regulation required of public companies.

What could go wrong? Venture capital investing has historically exhibited boom bust cycles, as private market valuations tend to overshoot reality as they are based more on conjecture than cash flows. And, as anyone who watches the TV show “Shark Tank” knows, startup valuations are negotiated between founders and VC’s, making them much more volatile and subjective. We will see what this AI-fueled cycle brings.

In the meantime, the equity market has become increasingly bifurcated. As private market valuations soar, startup companies stay private longer, and private equity firms buy up businesses in leveraged buyouts (LBO’s – our next column), our liquid, transparent, public stock markets are shrinking, and fast.

This is not investment advice.