How Investors Lose Money in Private Markets

Vyacheslav Dvornikov

Apr 11, 2025

Private and venture capital exchange-traded funds provide private investors with access to strategies that should increase diversification compared to investments in a sector index. But this year they are showing even greater losses than the Nasdaq-100. Here's what these funds are and why you should be cautious with them.

Attention to this was drawn by Meb Faber from Cambria Funds, a provider of exchange-traded funds. As stated on the Pacer company's website, the goal of its PEVC exchange-traded fund is to provide returns similar to investments in private equity (PE) and venture capital (VC) through traded securities, with higher liquidity. The fund's presentation states that its advantage is diversification, which reduces risks associated with both the actions of a single manager and market situations.

The fund is based on two indices in roughly equal proportions. FTSE PE Buyout is a benchmark for nearly 5,400 private companies backed by PE, with a total capitalization of $5 trillion. And FTSE VC, tracking over 13,000 private companies backed by VC, with a total capitalization of $2.5 trillion. PEVC holds approximately 200 public companies in its portfolio with a tilt towards IT.

Some other providers are trying to capitalize on the demand for such products by creating new exchange-traded funds that mimic PE. For example, the KraneShares Man Buyout Beta Index ETF invests in small and mid-cap stocks with similar characteristics to those in the portfolios of PE funds engaged in buyouts. The PEO AlphaQuest Thematic PE ETF mimics the "investment themes" of traditional PE funds focused on leveraged buyouts. Both funds are down 14.1% and 13.7% respectively since the beginning of the year.

This fund strategy is related to the fact that open funds are allowed to allocate only 15% of their assets in illiquid assets. Therefore, they offer indirect or synthetic exposure based on an index or theoretical investment approach.

Major Wall Street players are offering private investors more opportunities to bet on non-public markets. At the end of February 2025, approval for the launch of a private credit ETF was received by alternative asset manager Apollo Global Management and index provider State Street Global Advisors. More about this trend and why Movchan’s Group is cautious with such funds, we discussed here.

Why you should know this

Alternative asset funds, particularly PE, despite promises, do not provide a diversification advantage compared to investments in a sector index. The history of these funds is short, but already this year it is clear that they do not reduce risks when the Nasdaq-100 falls.

Moreover, betting on PE may also not work, because while gaining liquidity, ETF investors may lose in returns compared to direct investments in companies, Bloomberg quotes one of the analysts.