I believe none of the Fidelity funds have even a 0.1% weight for SpaceX. (I haven't checked recently and I can't read the blog because of HTTP 451, but I don't think this has changed.)
I criticized buying Google in my other comment, but at 0.29% it's actually better than the Fidelity funds in this regard.
SpaceX is valued at $36B, times 7.5% would be $2.7B for google's stake. Divide by google's market cap of $973B and you get 0.29%.
Investing $100 into Google to put 29 cents on SpaceX doesn't seem efficient. SpaceX could double in value, and the effect on the Google stock price would still be indistinguishable from noise.
Private equity isn't an appropriate asset class for 401(k)'s. Public markets have a threshold for rules/regulations and reporting requirements.
You don't want your retirement account to be a casino. You want companies that can provide stable, long-term growth of your portfolio-- so the money's there when you need it.
Private equity is commonly how the rich got rich. Theres all sorts of asset classes not available to the common public that keep them from reaping rewards. Another being investing in catastrophe bonds and insurance. Tons of fortunes made off all sorts of financial assets, that really arent that esoteric, they are just in the shadows.
"how the rich got rich" is survivorship bias. Private equity is also how many people lost some or all of their life savings. I myself have "invested" tens of thousands of dollars in a few startups that have actually gone on to be moderately successful. But my equity has been so diluted that I will be lucky if I get back half of my original investment. The game is heavily biased towards the last shark in the pool, and I am not a shark.
Private Equity doesnt work like that, vc investing is a completely different game. If you want to stay middle class, continue investing like the middle class, i.e. etfs. If you want to move up, invest like those in the class above you do. I think the common knowledge about what kinds of risk the common man should be taking on are in some ways constructed to keep the "prestige" of finance. Its an industry built upon the appearance of competence
By "invest like those in the class above you do" do you mean "manage the funds and siphon off a guaranteed percentage of the funds managed per year regardless of absolute or relative performance"?
Startup investing isn't private equity. Private equity is acquiring a profitable company with limited equity and a pile of debt, paying it down, and selling it at a profit.
> Startup investing is a subset of private equity investing
Not as the term is used in finance. Venture and PE are separate asset classes. Venture-like assets can become PE-like, in the same way private equity can become public equity. But PE is based on cash flows and leverage; VC is based on growth.
No one said VC, PE most certainly does invest in startups with exactly that focus on cash flows and leverage. The ones I have experience with tend to look at "older startups" think something like a 7-year-old company that don't really have a hope of a large cash payout but is still viable as a business. It seems to be one transition path for a traditionally VC backed company to resemble a regular small business.
I have personal experience with at least two startups that had undergone that experience and are still around right now.
Not according to the CFA Institute, or any number of other sources. LPs may incorrectly label PE and VC as separate subsets, but most large, institutional LPs will have PE, then separated by type.
CFA is the best source, but there are so many others, including my professional experience at a major asset manager.
> Definitions of private equity differ, but in this reading we include the entire asset class of equity investments that are not quoted on stock markets. The private equity class stretches from venture capital (VC)—working with early stage companies that in many cases have no revenues but have potentially good ideas or technology—all the way through to large buyouts (leveraged buyout, or LBO) in which the private equity firm buys the entire company. In some cases, these companies might themselves be quoted on the stock market, and the private equity fund performs a public-to-private transaction thereby removing the entire company from the stock market.
Depends on which part of the ladder you are on. If you're the fund manager of a big fund, you got rich. If you're the LP of growth seed rounds, you probably got rich. If you're the LP of later stage rounds, you probably didn't get rich.
Catastrophe bonds don’t offer very high yields. Usually between 2 and 5 percent above treasuries, if no catastrophes happen. They have a similar return as high yield bonds, with the advantage that the losses are generally uncorrelated with the returns of other financial assets.
Cat bond investors usually have large portfolios of other bonds, and are mostly insurance companies and pension funds who want to marginally improve their results without increasing volatility.
There are however situations where a cat bond investor can make a lot of money: live catastrophes. For example, if a hurricane is on its way to Florida, cat bonds covering Florida insurers will trade at a deep discount. If the hurricane changes its course and doesn’t make a landfall, their price goes back to par. A skilled (or lucky) investor could double their capital in a few days.
I call out cat bond investors because I used to work at a bond fund. Never seen so much money made so discreetly and often reliably. Highly leveraged reinsurance bets that often have constant payouts.
The change allows for private equity exposure through a multi-asset class managed fund. A 401(k) shouldn’t (and still can’t) invest in private equity directly and it can’t invest in a private equity fund. People won’t suddenly be betting their 401(k) on WeWork.
It’s definitely a bit riskier but no one is going to lose their retirement savings because of this rule change. The fees on the funds that offer this exposure are where 401(k) accounts will really get screwed.
I would not call public markets a casino, but I suppose some people have pretty liberal definitions for such things.
Public companies have to submit regular financial reports, which are handled by independent auditors. So you can be reasonably sure that a company claiming to make money, is making money. And executives have a legal requirement to protect share holder value.
Buying shares in Apple is much less of a "gamble" than opening your own business.
"Investing" in publicly traded companies (most volume is just between people with no affiliation to the board and are not buying from company stock offerings) and especially holding an index fund is not really investing, in the sense that it does not allocate any resources intelligently or do anything to seed growing companies. It's simply an attempt to grow personal wealth that doesn't do anything to improve the economy. Many people deride HFT and day traders while failing to understand that just buying the S&P index is actually more economically harmful.
For all the faults in the industry, fundamentally, private equity provides a means to invest in private companies that can benefit from loans or funding rounds, while also offering a return on investment to smart private equity investors. There have been plenty of scandals with private equity firms taking advantage of bankruptcy laws in large companies, but the industry as a whole seeds companies of every size, even though you only hear about VC firms in the tech startup bubble.
Think about what it means to buy into an index fund. When my next paycheck comes in, I'm going to use 20% of it to invest in the stock of some S&P 500 companies, even though I don't know most of their names and have no idea what results can be expected from them. Tossing money blindly at random companies isn't completely unproductive, since capital is valuable, but in terms of the underlying social purposes of investing it doesn't accomplish much.
Index investors are not really tossing money blindly. They are investing in a diversified portfolio and then constantly re-weighting their investment by market cap.
The alternative to that, before the rise and acceptance of index investing, was people using their 401k money to buy individual stocks. But we all know that your standard mom and pop investor is not going to have time to cut through the bullshit and effectively research companies when they have a 40hr/wk job, a family, hobbies, etc. So those 401k investments were based mostly on personal hunches, word of mouth, and pump and dump schemes. That was really dumb money, and did even less for the economy.
So while I agree with you that index investing isn't doing a ton to push corporate management to do better in the way "smart money" does (in theory), when you consider the world before index investing was a thing you have to admit that money today is on average "smarter."
The alternative is to not invest in companies or asset classes you don't understand. Most people are capable of understanding real estate, cash, and bonds, but the latter two have become severely weakened in the post-Bretton Woods economy. This has also coincided with a huge increase in wealth inequality, and index funds haven't changed that.
Average people should be able to grow their wealth over time without throwing money into inefficient instruments.
Before the rise of index investing, mom and pop didn't invest in stocks at all. They had a defined-benefit pension and kept their savings in a portfolio of CDs and government bonds.
Buying the index just inflates the prices of all large companies held in the index without any due diligence into which ones have future potential. Not only are you failing to allocate your own capital into the economy productively, but you are counter-acting the investments of those who have made diligent investment decisions (while also providing them with alpha and a means to profit from your inefficiency).
I don’t think this characterization is really fair. The private equity model requires a market to sell into when a bet pays off (so they can make another bet). Investors who just buy the index are helping to fund that.
By analogy, house flippers rely on a market for turnkey homes.
People who buy IPO's, and to a lesser extent, pick stocks, help fund that, but buying the index simply rewards companies that made it into the index and makes it harder to devalue under-performers. As with any statistically large index, some of the companies in the index will be correctly boosted by your capital, while others will be incorrectly so.
My point is not so much to decry index investing as evil as to point out the irony of index investors complaining about more productive forms of market participation.
Can we now subject large "private" firms to the same scrutiny that "public" have to obey? I always thought it was ridiculous that you could call a trillion dollar company with millions of shareholder, "private."
From the sounds of it, this ruling handwaves away the inherent risk of investing in a company whose finances you have no visibility into by claiming that putting it into a diversified private fund is the same as a diversified public fund. Which is fine, but they should be subject to the same reporting requirements as public companies.
These regulations didn't appear out of thin air. The business world is full of evil people looking to rob everyday investors. See: Enron.
I believe the assumption is the fund manager is the kind of investor that will have the ability and resources to do proper due diligence before investing, contrary to the case of public companies that can sell stock to the average Joe
But now the issue is due diligence of the GP, the fund manager. I think that's what OP is talking about. PE firms don't have the same level of disclosure requirements as public companies (with the exception of those that are now public companies), and you need to research a fund just as you would research a stock.
Fund investors are usually family offices, endowments, foundations, fund of funds, secondaries funds, etc., and they all do a huge amount of due diligence on prospective fund investments. It's just as much work to research funds as it is to research public equities.
For reference, I have been an investment professional at both a PE firm and a hedge fund.
But similarly, to my knowledge only accredited investors may invest in PEs / HFs, and shares in those funds are special kinds of securities that differ significantly from those covered by SEC / blue-sky laws and therefore are not subject to the same disclosure requirements. It's not in anyone's interest to treat these different types of investments as if they were similar.
I'm not in PE per se, but would think investment in one is through an investment contract which is an exempt security
Private firms with more than $10 million in assets and more than 2000 investors (excluding employees) are already subjected to the same scrutiny as public firms have to obey. (The complication here, of course, is that a retirement fund may be a single investor for legal purposes even if it's managing many people's assets.)
This opens up some excellent tax avoidance strategies.
I'm assuming this is available also for IRA and Roth IRA. What you do is setup two transactions: One that will lose money in the IRA, and the other that will gain in the Roth IRA. (A straddle.) Make sure you execute both at the same time (if it's a thinly traded security you can end up trading with yourself, but that's not necessary).
Then sell, and do it again.
You effectively move money from IRA to Roth IRA. (And yes it's legal, I contacted the IRS and asked.)
In the open market you can only move a small percent at a time, but with private equity the gains and losses are much greater and you can effectively move all your money.
...and if you can, why bother with the losing side of the transaction?
Conversely, if you can't pick winners, then I think you can only set up a pair of trades which sometimes moves money in and sometimes out, with a net of zero.
I tried making charts of option prices in Excel and didn't come to any particular conclusion, except that maybe you always lose because of the dividend rules, spread, and commissions, and it seems like the maximum expected value is at-the-money.
It makes me think of violating thermodynamics with Maxwell's Demon.
If you trade with yourself, then it would be uninteresting plain fraud, and if you don't, I have the feeling the market will prevent you from getting anywhere.
Can someone set up a "professionally managed fund" where you can set up an LLC, have the fund invest your 401k in that LLC, pay yourself a salary equal to the amount invested? Bypassing early withdrawal fees for some nominal fee?
2. I have a regular job which is earning me income.
3. I put some of that income into a 401K.
4. I direct the 401K to invest in my LLC.
5. As the guy running the LLC, I take that amount of money and pay myself a salary equivalent to what I put in.
How is that money ever going to grow? What's the benefit? You didn't pay taxes? Pretty weak benefit, IMO.
There is such a thing as self directed retirement. People buy real estate with it all the time. The regulations require, though, that any profits made out of it must go back into the retirement account until you're old enough to withdraw. I could use retirement money to buy a broken house, fix it up, and flip it. But all profits have to go back into that account. I cannot keep any for myself.
I did word it poorly, and you captured what I was trying to get at (thanks).
The benefit is for people that need to withdraw from their 401k before retirement without getting hit with the interest/fees. I guess another part of the benefit is if you want to take advantage of employer match but you don't want to invest in your 401k.
I didn't know about self directed retirement. I'll have to go do some research.
Well, avoiding taxes, and getting employer matches are the benefits, but you haven't explained how the amount will grow. You haven't invested it in anything.
No point. There's far easier ways to withdraw tax-deferred money before full retirement age without penalties. Waiting 5 years after a Roth conversion or a 72(t) election are far easier.
There's also self-dealing restrictions on IRAs and presumably self-directed 401(k)s as well.
Besides which, if you're fucking with the IRS, there's far better things to do than merely avoid a 10% early withdrawal penalty. Eg - have your Roth account own some company, then figure out a way to smuggle a gigantic pile of cash into said company. That money then never ends up getting taxed.
This used be a thing but the IRS caught on and added Abusive Roth IRA Transactions to their list of Listed Transactions. Most are collapsed down into what amounts to an arrangement to contribute beyond the allowable Roth IRA limit.
IRA withdrawals are taxable at income rates: 37% for that kind of jack. He's delaying rather avoiding. If he was really smart, he'd have done this outside of a retirement account and paid the 20% capital gains rate.
For those against -- do you really prefer that only well-connected billionaires are allowed to invest in startups, and actually capture the rapid growth?
Most unicorns (and no, they aren't all scams -- many are pretty stable, or exited successfully, a la LinkedIn, Salesforce, etc) were private until they were worth tens of billions. Any gains post-IPO are small multiples of the original investment.
The only people able to invest, and actually capture that growth, were already wildly wealthy. Do you think that's fair?
I'd consider permitting it outside of 401(k) funds. But the quality of private equity investment opportunities offered to middle class people != the quality offered to folks like Tiger Woods, who investing in Google's Series A back in '99.
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[ 3.1 ms ] story [ 141 ms ] threadI criticized buying Google in my other comment, but at 0.29% it's actually better than the Fidelity funds in this regard.
Investing $100 into Google to put 29 cents on SpaceX doesn't seem efficient. SpaceX could double in value, and the effect on the Google stock price would still be indistinguishable from noise.
You don't want your retirement account to be a casino. You want companies that can provide stable, long-term growth of your portfolio-- so the money's there when you need it.
Pe includes many illiquid subcategories including real estate, LBOs, startup investing, even niche stuff like infrastructure investing
Not as the term is used in finance. Venture and PE are separate asset classes. Venture-like assets can become PE-like, in the same way private equity can become public equity. But PE is based on cash flows and leverage; VC is based on growth.
I have personal experience with at least two startups that had undergone that experience and are still around right now.
CFA is the best source, but there are so many others, including my professional experience at a major asset manager.
https://www.cfainstitute.org/en/membership/professional-deve...
> Definitions of private equity differ, but in this reading we include the entire asset class of equity investments that are not quoted on stock markets. The private equity class stretches from venture capital (VC)—working with early stage companies that in many cases have no revenues but have potentially good ideas or technology—all the way through to large buyouts (leveraged buyout, or LBO) in which the private equity firm buys the entire company. In some cases, these companies might themselves be quoted on the stock market, and the private equity fund performs a public-to-private transaction thereby removing the entire company from the stock market.
Cat bond investors usually have large portfolios of other bonds, and are mostly insurance companies and pension funds who want to marginally improve their results without increasing volatility.
There are however situations where a cat bond investor can make a lot of money: live catastrophes. For example, if a hurricane is on its way to Florida, cat bonds covering Florida insurers will trade at a deep discount. If the hurricane changes its course and doesn’t make a landfall, their price goes back to par. A skilled (or lucky) investor could double their capital in a few days.
It’s definitely a bit riskier but no one is going to lose their retirement savings because of this rule change. The fees on the funds that offer this exposure are where 401(k) accounts will really get screwed.
Public companies have to submit regular financial reports, which are handled by independent auditors. So you can be reasonably sure that a company claiming to make money, is making money. And executives have a legal requirement to protect share holder value.
Buying shares in Apple is much less of a "gamble" than opening your own business.
You should take a look at Fed actions regarding public markets over the past few months.
Certainly all the big PF in the UK will have some PE - source I had an off the record briefing from a trustee on one of the biggest UK ones.
For all the faults in the industry, fundamentally, private equity provides a means to invest in private companies that can benefit from loans or funding rounds, while also offering a return on investment to smart private equity investors. There have been plenty of scandals with private equity firms taking advantage of bankruptcy laws in large companies, but the industry as a whole seeds companies of every size, even though you only hear about VC firms in the tech startup bubble.
What
The alternative to that, before the rise and acceptance of index investing, was people using their 401k money to buy individual stocks. But we all know that your standard mom and pop investor is not going to have time to cut through the bullshit and effectively research companies when they have a 40hr/wk job, a family, hobbies, etc. So those 401k investments were based mostly on personal hunches, word of mouth, and pump and dump schemes. That was really dumb money, and did even less for the economy.
So while I agree with you that index investing isn't doing a ton to push corporate management to do better in the way "smart money" does (in theory), when you consider the world before index investing was a thing you have to admit that money today is on average "smarter."
Average people should be able to grow their wealth over time without throwing money into inefficient instruments.
By analogy, house flippers rely on a market for turnkey homes.
My point is not so much to decry index investing as evil as to point out the irony of index investors complaining about more productive forms of market participation.
From the sounds of it, this ruling handwaves away the inherent risk of investing in a company whose finances you have no visibility into by claiming that putting it into a diversified private fund is the same as a diversified public fund. Which is fine, but they should be subject to the same reporting requirements as public companies.
These regulations didn't appear out of thin air. The business world is full of evil people looking to rob everyday investors. See: Enron.
Fund investors are usually family offices, endowments, foundations, fund of funds, secondaries funds, etc., and they all do a huge amount of due diligence on prospective fund investments. It's just as much work to research funds as it is to research public equities.
For reference, I have been an investment professional at both a PE firm and a hedge fund.
I'm not in PE per se, but would think investment in one is through an investment contract which is an exempt security
I don't think employees are excluded from this.
I'm assuming this is available also for IRA and Roth IRA. What you do is setup two transactions: One that will lose money in the IRA, and the other that will gain in the Roth IRA. (A straddle.) Make sure you execute both at the same time (if it's a thinly traded security you can end up trading with yourself, but that's not necessary).
Then sell, and do it again.
You effectively move money from IRA to Roth IRA. (And yes it's legal, I contacted the IRS and asked.)
In the open market you can only move a small percent at a time, but with private equity the gains and losses are much greater and you can effectively move all your money.
Conversely, if you can't pick winners, then I think you can only set up a pair of trades which sometimes moves money in and sometimes out, with a net of zero.
I tried making charts of option prices in Excel and didn't come to any particular conclusion, except that maybe you always lose because of the dividend rules, spread, and commissions, and it seems like the maximum expected value is at-the-money.
It makes me think of violating thermodynamics with Maxwell's Demon.
If you trade with yourself, then it would be uninteresting plain fraud, and if you don't, I have the feeling the market will prevent you from getting anywhere.
1. I set up an LLC.
2. I have a regular job which is earning me income.
3. I put some of that income into a 401K.
4. I direct the 401K to invest in my LLC.
5. As the guy running the LLC, I take that amount of money and pay myself a salary equivalent to what I put in.
How is that money ever going to grow? What's the benefit? You didn't pay taxes? Pretty weak benefit, IMO.
There is such a thing as self directed retirement. People buy real estate with it all the time. The regulations require, though, that any profits made out of it must go back into the retirement account until you're old enough to withdraw. I could use retirement money to buy a broken house, fix it up, and flip it. But all profits have to go back into that account. I cannot keep any for myself.
The benefit is for people that need to withdraw from their 401k before retirement without getting hit with the interest/fees. I guess another part of the benefit is if you want to take advantage of employer match but you don't want to invest in your 401k.
I didn't know about self directed retirement. I'll have to go do some research.
There's also self-dealing restrictions on IRAs and presumably self-directed 401(k)s as well.
Besides which, if you're fucking with the IRS, there's far better things to do than merely avoid a 10% early withdrawal penalty. Eg - have your Roth account own some company, then figure out a way to smuggle a gigantic pile of cash into said company. That money then never ends up getting taxed.
"At the time, Mr. Romney was not able to use a Roth IRA to make these investments because his income tax bracket exceeded the allowable threshold."
Most unicorns (and no, they aren't all scams -- many are pretty stable, or exited successfully, a la LinkedIn, Salesforce, etc) were private until they were worth tens of billions. Any gains post-IPO are small multiples of the original investment.
The only people able to invest, and actually capture that growth, were already wildly wealthy. Do you think that's fair?