The leveraged-buyout private equity, venture capital, and hedge fund sectors have been remarkably turbulent in recent years. Since the Returns Counter’s Q2 2021 update, which focused on the COVID-19 pandemic’s early-2020 market volatility, private equity and venture capital have surged and then faltered, returning to about where they started relative to public markets. Hedge funds, meanwhile, have consistently underperformed compared to a simple balanced portfolio.
Please note the following updates to the Returns Counter methodology based on data availability, benchmark selection, and return reliability.
First, quarterly returns draw upon fewer sources. Private equity and venture capital returns include data from Cambridge Associates, Preqin, and PitchBook up until 2020, but thereafter only Cambridge Associates. Hedge fund returns include data from BarclayHedge, EurekaHedge, Hedge Fund Research, and Preqin up until Q3 2020, but thereafter only BarclayHedge and EurekaHedge.
Second, the Returns Counter uses the NASDAQ instead of the S&P 500 as a benchmark for the venture capital industry because the NASDAQ’s tech-heavy composition better mirrors venture capital investment.
Third, the Returns Counter focuses on 10-year rolling returns rather than cumulative returns. Rolling returns are more reliable than cumulative ones because they assess performance over a fixed period and show returns over that period from every possible starting point. Cumulative returns can present a skewed picture depending on the starting point chosen. Rolling returns also help to highlight periods of under- and overperformance over time, whereas a cumulative return that moves far above or below the benchmark will appear to be permanently over- or underperforming, even in periods where that trend reverses.
Private Equity
Private equity experienced one of its best years in 2021: fundraising accelerated, exit values soared, and stimulus money ran free. However, the momentum came to a halt soon after. In 2022, interest rates rose, inflation surged, and geopolitical tensions escalated, which increased the cost of borrowing, swelled operating expenses, and intensified economic unease. As a result, the industry saw fundraising, exit values, and deal activity decrease. This trend generally persisted throughout 2023 and into 2024 as fundraising reached a 10-year low and exit and deal values tumbled.
As shown previously, private equity consistently outperformed the S&P 500 in 10-year rolling returns until 2019; thereafter, the industry and index yielded nearly indistinguishable returns until the onset of the COVID-19 pandemic. Since then, private equity briefly surged ahead of the S&P 500 and then, unable to maintain its momentum, stumbled back toward it.
As of Q1 2024, private equity’s 10-year rolling return was 14.5%, surpassing the S&P 500’s 13.0%. The industry’s extraordinary performance in 2020 and 2021 continues to carry it forward despite underperforming the S&P 500 in five of the past six quarters.
Venture Capital
Similar to private equity, venture capital performed exceptionally well in 2020 and 2021. Strong fundraising paired with robust competition and a hungry IPO market (amplified by the surge in SPACs) drove this success. In 2022, these trends reversed, yielding fewer deals and nearly ceasing exit activity for two years. The unease of a potential recession and concerns from the dormant merger market persisted throughout 2023 as deal volume continued to decline. In Q1 2024, the IPO market remained inactive, deal count continued to fall, and deal value stagnated.
The venture capital industry is underperforming relative to the NASDAQ. As of Q1 2024, the NASDAQ’s 10-year rolling return of 15.7% exceeds venture capital’s 14.0%.
Venture capital is performing poorly because of 2021 vintage funds. In 2021, investors poured more capital in venture funds than in any previous year, inflating valuations to the benefit of existing funds. Then, returns on exits fell short of expectations. Now, venture capitalists are struggling to fundraise newer funds, limiting opportunities for the industry to balance out 2021 vintage funds’ negative returns.
Hedge Funds
The hedge fund industry stands out as the most predictable among the three alternative asset classes. Since Q2 2021, hedge funds continued to underperform relative to the 60% equity and 40% bond portfolio, represented by the Vanguard Balanced Index Fund Admiral Shares portfolio (VBIAX). To their credit, the hedge fund industry successfully hedged, over this period, losses from all 5 quarters where the VBIAX stumbled. However, this was not nearly sufficient to offset losses from the industry’s consistent, long-term underperformance. As of Q1 2024, the VBIAX yields a 10-year rolling return of 8.1%, surpassing the hedge fund industry’s 5.6%.