Harvard Paper Discusses Risks in “Retail Private Funds”

A recent paper from a Harvard Law School academic discusses risks posed by increasing retail investor access to private funds. The author focuses on two primary risks, questioning the reported returns of these funds and the differences between the funds sold to wealthier investors vs. the funds sold to the broader market. “Traditional private funds often report returns with very low volatility, but these “smoothed” returns are a product of the fact that the funds’ investments do not have observable market values and are valued using financial models,” the author asserts, urging that the SEC encourage fund sponsors to make sure the fair value estimates of these funds align with contemporaneous market movements. The second risk addresses the concern that these retail focused funds are “being filled with worse investments than funds being sold to more sophisticated investors.” The author studied how the performance of retail private funds (BDCs) differed across funds that are sold to different investor groups and found “suggestive evidence that BDCs that are sold only to relatively wealthy investors have better (reported) returns, on average, than BDCs sold to a broader range of investors.” The paper offers several policy implications based on its findings, including steps the SEC may take to address these risks.

Click here to read the Harvard Law School paper covering risks in expanding retail access to private funds.