The whole Blue Owl saga and whatever it means for private credit continues to draw more attention. Here's the latest from the WSJ, it is a festival of very long running themes we regularly explore.
Chris Paladino, 58 years old, said he initially decided to invest around a quarter of his portfolio in private credit, hoping for yields of 9%. When he saw the headlines last week, he briefly wondered if he had made a mistake.
This sort of yield chasing is something that repeats over and over. A 9% yield in a 4% world is risky. It's not that the risk should not be taken but 25% of your money exposed to just one risk is very aggressive. The Journal said that this guy second guessed what he had done but then doubled down with another $200,000. This guy also bought shares in Ares (ARES) common stock.
Obviously he could turn out to be correct so this really is about understanding what risks you want to take and understand the fallout if you are wrong. Paladino is in very deep. Unlike plain vanilla equities, if this goes down a lot, it doesn't have to eventually come back.
If he was enticed by 9% yields, he probably could have constructed a tranche of his portfolio of several different exposures, each with their own unique risk factors that could have gotten him the same 9%. Same yield much less risk to the bottom line value of the portfolio.
With growth slowing from traditional pension-fund and endowment clients, private-markets giants such as Blue Owl, Apollo Global Management and Blackstone have aggressively courted individual investors from everyday millionaires on up. The firms are now pushing to get their offerings into 401(k)s. Some in the investing world said the funds aren’t well-suited for the masses, in part because they tend to come with higher fees and are harder to sell.
I read this as "we need more suckers." That was mean. I meant bag holders.
One advisor is cited as recommending 5% to private credit. Risk-wise, that's reasonable. It either works out or it doesn't but the client is not seriously damaged if it goes badly.
Quick pivot to a suite of four new ETFs from Innovator that they are calling Managed 10 Buffer. Basically the first 10%-14% of downside is protected but unlike other buffer products, these allow for capturing 80-90% of the upside.
In the webinar, they talked about the possibility of these funds protecting as much as 20% down depending on how the volatility impacts the options combo embedded into the strategy. Thinking through it, if the market drops 25% and if the Managed 10 Buffer actually protects as much as the first 20%, then it's only a 5% decline for the Managed 10 Buffer.
I don't doubt these will work as intended but what they're really doing is protecting against down a little. I would be more interested in protecting against down a lot, down a little goes with the territory. There are a lot of ifs in getting the 20% protection but I am sure the 10-14% will work. Maybe the concept doesn't work not protecting the first 15% down but then protecting from -15% onward, I'm not sure but I am more concerned with down a lot than with down a little.
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