The most significant risk faced by asset managers is not temporal but is related to the risk embedded within the allocation to the asset-classes, as the majority of asset managers deploy pancake economics, wide in circumference shallow in the analysis of risk related to each asset — a game of risk aversion not unlike the musical-chair game.
I particularly investigated the critical path of asset management risk deployed to venture capital, an improper subcategory of private equity (I’ll explain soon). As I describe in The (first ever) State of Venture Capital, asset managers deploy more than ten levels of bottom-heavy diversified risk. A critical path of risk with too much room for error, lacking accountability, and incompatible with yielding consistent returns of long.
What that tells you is how asset management today is modeled after the (multi-generational) protection of downside, not quite the same as a model to perpetuate upside. And downside protection alone (although not to be ignored) will never drive consistent outlier returns at the fringe of the asset’s expansion and capacity. In other words, asset management must change its model to reflect the risk of the investible asset, not be based on some stale and artificial nomenclature borrowed from the past.
To wit, the risk in venture capital (investing in foresight, before the chasm) is diametrically opposite to the risk of private equity (investing in hindsight, post chasm). Asset managers use the same risk profiles and allocation structures for venture capital as private equity, as venture capital is foolishly considered a subcategory of private equity.
I am less deeply familiar with other asset-classes but know from talking to the most prominent asset managers in the country (like CalPERS and BlackRock), similar asset-management misfits and unwarranted embedded risk occurs in other asset classes.