Get Out Of The Game And Hide In The Locker Room?

 I just read a very interesting article in Bloomberg.  It turns out that major national wealth and pension funds have radically increased their holdings in private, non-marketable investments like hedge funds, infrastructure projects and real estate. The chart below, taken from the article, tells the story.

When, as now, traditional stock and bond markets drop, these non-marketable investments "shield" the valuations of such pension and wealth funds because private holdings are marked to market (valued) very infrequently, making them look like they are outperforming.  Even then, valuations depend on "independent" experts who get paid by the investors themselves.  Having a bit of experience on the subject, I can tell you that such valuations are highly subjective.

When large investors exit traditional markets, volatility increases - there are fewer large, long-term investors to act as dampeners/shock absorbers.  To make a football analogy, a team's star players  are exiting the game and are hiding in the locker room.  This leaves the B players out in the field (eg retail investors with their ETFs) at the mercy of sharp short-term players, scalpers, and manipulators.  The A players can claim that they are not being beaten, but the team will lose the game, anyway. Even worse, the whole of the NFL (or FIFA, pick your football) will soon get totally disorganized and eventually fail.

And the final insult? As the A team hides in the locker room, it will get out of touch with the game, grow fat and lazy.  When it comes time for them to prove their A status by playing a game (get a real mark-to-market valuation for their illiquid assets) they will discover that they are now C players...