GMO makes the case that the investment environment which powered private markets for decades has changed—and that investors are rediscovering liquid alternatives as a result.
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The traditional 60/40 diversification assumption has become less reliable. In 2022, both the S&P 500 and a 10-year US Treasury fell around 18%, illustrating how stocks and bonds can suffer simultaneously when long-duration assets reprice.
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Private markets have their own problem: reported diversification may partly be an accounting illusion. Infrequent and discretionary valuations suppress measured volatility even though the underlying businesses remain exposed to many of the same economic risks as public companies.
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Liquidity is deteriorating too. Private equity and venture-capital distributions have fallen 50–60% compared with five years ago, while continuation funds represented 20% of PE exits over the past year.
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The return premium is also being questioned. The Harvard Business School data cited by GMO shows private-equity direct alpha versus the S&P 500 at -4.62% over five years, with essentially no alpha over 20 years.
Read the full report for why the next alternatives cycle may favour liquidity over lockups—and genuine diversification over the appearance of it.
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