AQR's Asness Says Private Markets Are "Laundering Volatility"

What's New

Cliff Asness, founder of $100 billion quantitative giant AQR Capital Management, delivered a scathing critique of private markets during Bloomberg's Money Stuff podcast, accusing the industry of "volatility laundering" by exploiting accounting rules to create artificially smooth returns while charging excessive fees for what amounts to disguised public market exposure. Asness called the industry's aggressive push to include private investments in retail 401(k) plans a "terrible idea" driven by fee hunger rather than investor benefit.

Why It Matters

With endowments now allocating an estimated 43% to private markets and the industry aggressively targeting retail investors through ETFs and interval funds, Asness's warnings signal a potential reckoning for one of finance's most profitable sectors. His "volatility laundering" thesis challenges the fundamental risk-return assumptions driving billions in institutional capital allocation while threatening the fee structures that have made private equity enormously profitable.

Big Picture Drivers

• Fee arbitrage: Private markets charge 2% management and 20% performance fees while public market costs face relentless compression toward zero

• Regulatory loophole: Private investments mark to model rather than daily market prices, creating false risk profiles that institutions prefer over transparency

• Behavioral amplification: Social media and gamified trading have extended bubble duration and severity beyond historical norms through 24/7 connectivity

• Institutional saturation: Private equity has "exhausted the institutions" and needs new capital sources to maintain growth trajectories

• Illiquidity mispricing: What was once a "bug" demanding compensation has become a "feature" investors pay premiums for

By The Numbers

• 43%: Estimated endowment allocation to private markets, up dramatically from historical norms

• 2% + 20%: Standard private equity fee structure versus sub-0.1% for index funds

• 30 years: Asness's career span during which he witnessed two major market bubbles that shifted his view on behavioral finance

• 24 years: How long AQR has been publishing research warning about hedge fund industry's lack of alpha after fees

Key Insights

• Risk measurement: Private equity appears less risky only because it doesn't mark to market daily like public investments, creating fundamental unfairness in how different asset classes report performance

• Fee justification: Most private market strategies are charging "massive alpha fees for beta" returns that don't justify their 2% management fees and 20% performance fees compared to what investors could achieve in public markets

• Future returns: The same fee compression pressures that have driven down public market costs will likely make it even harder for private markets to justify their fee structures going forward

• Retail risk: Pushing illiquid private investments into 401(k) plans represents a dangerous prioritization of fee generation over investor welfare, particularly for individuals who may need liquidity during market stress

Key Trends to Watch

• Retail expansion accelerates as private equity firms launch ETFs and push 401(k) inclusion despite fundamental liquidity mismatches between products and investor needs.

• Performance pressure mounts on private markets as fee compression in public alternatives makes high-cost structures increasingly difficult to justify to sophisticated investors.

• Regulatory scrutiny increases around private market valuation practices and retail investor protection as more products target ordinary Americans.

• Machine learning adoption transforms quantitative investing from simple factor models toward complex non-linear systems that better capture market relationships.

Memorable Quotes

• "I think a tremendous amount of the private world is charging massive alpha fees for beta." - Asness, explaining his core criticism of private market fee structures

  
  

• "Why don't we get to do that? When we've had a tough year because the market's gone crazy and we were on the wrong side of that I have to tell my clients we're down 12%. I don't get to tell my clients we're up based on where I'd mark the portfolio." - Asness, on the unfair advantage private markets have in reporting returns

  
  

• "If I'm right that people love the fact that they don't have to look at the volatility, that means illiquidity is no longer a bug, it is now a feature." - Asness, explaining how illiquidity premiums may have inverted

  
  

• "This feels a little bit more like we've exhausted the institutions... it has a feel of who else are we going to get to own this stuff." - Asness, on why private markets are targeting retail investors

The Wrap

Asness's critique strikes at the heart of modern portfolio theory's application to private markets, arguing that apparent outperformance stems from accounting advantages rather than genuine alpha generation. As private investments increasingly target retail investors with limited liquidity awareness, his warnings about "volatility laundering" and excessive fees represent an existential challenge to an industry built on opacity and high costs, with implications extending far beyond institutional portfolios to retirement security for ordinary Americans.