As investors, we’re presented with lots of compelling reasons to commit to a fund. One line LPs consistently hear is that they should invest with a particular general partner because it protects the downside better than anyone else does. But, something we’ve been pondering, does this downside protection matter? Do we need it when investing in the private markets?

To look into this, Hamilton Lane did an analysis of up and down markets from 1995 to 2015. It made reasonable assumptions about what constituted up and down in terms of return thresholds to eliminate flat or average markets in the context of private market returns.

Dispersion of Returns by Style

As the chart above shows, returns were higher in up markets and lower in down markets. Wow, right! That’s behavior most investors expect.

But, what we really want to highlight here is the dispersion of returns. You’ll see that it is lower in all strategies, except real estate. While this doesn’t seem like much of a difference visually, this is, in actuality, hundreds of basis points! That’s real money to investors. Based on this data, we would argue that investors should be less concerned about downside protection. In fact, most general partners do a good job of downside protection. However, that does not hold true in real estate. Here, investors need to be very focused on downside protection.

After conducting this analysis, we then decided to see if geography made a difference in downside protection.

Dispersion of Returns by Geography

No surprise here. As the chart above shows, returns are again generally higher in up markets versus down markets. Geography seems to have little impact. However, across emerging markets, the increase in dispersion in up markets is less pronounced than that of developed markets.

Final Thoughts

It seems that most of what disparages the private markets, around needing downside protection, simply isn’t true. We feel that the ability to use and analyze data, as done using Hamilton Lane’s data in Cobalt, will continue to evolve the private markets. By having this data easily accessible, through platforms like Cobalt, investors can continue to make informed, intellectual decisions.

To learn more about how you can access this data and other analytics through Cobalt, reach out to us.