Conventional wisdom suggests that if you're going to invest $10 million into an illiquid real estate investment that will not bear delicious fruit for 7 to 10 years, you may want to be compensated for the illiquid nature of your commitment. In other words, there's an "illiquidity premium." Flexibility is worth something. If you can get the same return and have the flexibility to get your money back when you want it, isn't that better? I don't know; maybe that's not always the case. Here's an excerpt from a clever article written by Cliff Asness, founder of AQR Capital Management, where he argues the reverse:
If people get that PE [private equity] is truly volatile but you just don’t see it, what’s all the excitement about? Well, big time multi-year illiquidity and its oft-accompanying pricing opacity may actually be a feature not a bug! Liquid, accurately priced investments let you know precisely how volatile they are and they smack you in the face with it. What if many investors actually realize that this accurate and timely information will make them worse investors as they’ll use that liquidity to panic and redeem at the worst times? What if illiquid, very infrequently and inaccurately priced investments made them better investors as essentially it allows them to ignore such investments given low measured volatility and very modest paper drawdowns?
Perhaps another way to think about illiquid private investments is that they kind of force you to think more like Warren Buffett. He has so many great lines to this effect: "If you aren't willing to own a stock for 10 years, don't even think about owning it for 10 minutes." And: "The stock market is a device for transferring money from the impatient to the patient." He has also written over the years about how a tolerance for short-term volatility can improve long-term prospects. So, behaving in this way, it would seem, is generally good for making money.
The problem — and this is really Cliff's more precise argument — is that the majority of people simply aren't good at being like Warren Buffett. We're impatient and emotional. That's why he's so remarkable. His approach certainly sounds simple, but it's clearly not so easy. Illiquidity can help with this. It removes the fraught thinking part and might actually protect you from your own thoughts and emotions.
Cover photo by Maxim Hopman on Unsplash
Stablecoins, as we have talked about, seem to be the first cryptocurrency use case that has achieved product-market fit. According to this recent piece by Chris Dixon in the Financial Times (which was later republished here), stablecoins moved over $12 trillion in value last year, even after filtering out stuff like bot activity. This is closing in on the $17 trillion in transactions that Visa processed last year; but crucially, stablecoin transactions are made at a fraction of the cost.
It also doesn't matter if people recognize that they're using crypto or not. The backend is continuing to be abstracted:
People all over the world will barely recognise when they’re using stablecoins when making transactions supported by them. Most people will assume they’re just using dollars. And they will be, because the differences between a stablecoin and a dollar are becoming an abstraction for the end user.
And the great promise is the following:
This isn’t just about payments. It’s a realignment of global finance. The internet gave us borderless communication. Stablecoins give us borderless value transfer. With clear rules and market structure in place, they can become both the pipes and the pillars of a new financial system.
What's also interesting, though, is that this shift seems to be strengthening US dollar dominance, as opposed to undermining it:
Stablecoin adoption also has an underappreciated second-order effect: The tokens reinforce dollar dominance in a multipolar world, creating a strong new source of demand for US debt. Leading stablecoin issuers like Circle and Tether already have nearly $140bn in direct holdings of short-term government debt, making them a top 20 holder of US debt today.
If you're looking to invest alongside this shift — and, oh boy, this is definitely not investment advice! — well, then, buying some Ether (ETH) may not be the worst idea. The majority of stablecoin transactions settle on Ethereum or on an Ethereum Layer 2, meaning that every time a transaction is completed, some amount of ETH is burned or destroyed. (
A closed-end real estate fund is an investment vehicle with a finite life (call it anywhere from 5 to 12 years, plus extension options). These types of funds have a specific timeframe for raising capital, investing, harvesting the investments they have made, and then distributing proceeds to investors. This is in contrast to an open-ended fund, also known as an "evergreen" fund, which has an infinite life and can accept investments throughout its lifespan.
As a result of these differences, closed-end funds are often used for opportunistic or value-add opportunities where the defined strategy is to buy, fix/develop, and then sell, whereas open-ended funds are often used for core opportunities, where the assets are intended to be held indefinitely for income. Neither fund structure is inherently good or bad; each has its benefits and drawbacks.
However, the perceived weighting of these benefits and drawbacks shifts during market cycles. Since global real estate markets started to turn downward in 2022, the ability to be patient and think long-term has become a key ingredient for survival. You may have done everything you said you would do perfectly, but the market may not be there to grant you the liquidity you had originally planned for.
Now the question becomes: How patient can and should we be?
In my opinion, the greatest opportunities exist for (1) the larger firms that have a strong balance sheet and defensible income-producing properties and (2) the smaller, nimble firms that can capitalize on the dislocation in the market (and aren't overly burdened with legacy assets that are sucking up resources and capacity).
This perspective is true of other sectors as well. This weekend, venture capitalist Chris Dixon of a16z wrote a post titled, "
Conventional wisdom suggests that if you're going to invest $10 million into an illiquid real estate investment that will not bear delicious fruit for 7 to 10 years, you may want to be compensated for the illiquid nature of your commitment. In other words, there's an "illiquidity premium." Flexibility is worth something. If you can get the same return and have the flexibility to get your money back when you want it, isn't that better? I don't know; maybe that's not always the case. Here's an excerpt from a clever article written by Cliff Asness, founder of AQR Capital Management, where he argues the reverse:
If people get that PE [private equity] is truly volatile but you just don’t see it, what’s all the excitement about? Well, big time multi-year illiquidity and its oft-accompanying pricing opacity may actually be a feature not a bug! Liquid, accurately priced investments let you know precisely how volatile they are and they smack you in the face with it. What if many investors actually realize that this accurate and timely information will make them worse investors as they’ll use that liquidity to panic and redeem at the worst times? What if illiquid, very infrequently and inaccurately priced investments made them better investors as essentially it allows them to ignore such investments given low measured volatility and very modest paper drawdowns?
Perhaps another way to think about illiquid private investments is that they kind of force you to think more like Warren Buffett. He has so many great lines to this effect: "If you aren't willing to own a stock for 10 years, don't even think about owning it for 10 minutes." And: "The stock market is a device for transferring money from the impatient to the patient." He has also written over the years about how a tolerance for short-term volatility can improve long-term prospects. So, behaving in this way, it would seem, is generally good for making money.
The problem — and this is really Cliff's more precise argument — is that the majority of people simply aren't good at being like Warren Buffett. We're impatient and emotional. That's why he's so remarkable. His approach certainly sounds simple, but it's clearly not so easy. Illiquidity can help with this. It removes the fraught thinking part and might actually protect you from your own thoughts and emotions.
Cover photo by Maxim Hopman on Unsplash
Stablecoins, as we have talked about, seem to be the first cryptocurrency use case that has achieved product-market fit. According to this recent piece by Chris Dixon in the Financial Times (which was later republished here), stablecoins moved over $12 trillion in value last year, even after filtering out stuff like bot activity. This is closing in on the $17 trillion in transactions that Visa processed last year; but crucially, stablecoin transactions are made at a fraction of the cost.
It also doesn't matter if people recognize that they're using crypto or not. The backend is continuing to be abstracted:
People all over the world will barely recognise when they’re using stablecoins when making transactions supported by them. Most people will assume they’re just using dollars. And they will be, because the differences between a stablecoin and a dollar are becoming an abstraction for the end user.
And the great promise is the following:
This isn’t just about payments. It’s a realignment of global finance. The internet gave us borderless communication. Stablecoins give us borderless value transfer. With clear rules and market structure in place, they can become both the pipes and the pillars of a new financial system.
What's also interesting, though, is that this shift seems to be strengthening US dollar dominance, as opposed to undermining it:
Stablecoin adoption also has an underappreciated second-order effect: The tokens reinforce dollar dominance in a multipolar world, creating a strong new source of demand for US debt. Leading stablecoin issuers like Circle and Tether already have nearly $140bn in direct holdings of short-term government debt, making them a top 20 holder of US debt today.
If you're looking to invest alongside this shift — and, oh boy, this is definitely not investment advice! — well, then, buying some Ether (ETH) may not be the worst idea. The majority of stablecoin transactions settle on Ethereum or on an Ethereum Layer 2, meaning that every time a transaction is completed, some amount of ETH is burned or destroyed. (
A closed-end real estate fund is an investment vehicle with a finite life (call it anywhere from 5 to 12 years, plus extension options). These types of funds have a specific timeframe for raising capital, investing, harvesting the investments they have made, and then distributing proceeds to investors. This is in contrast to an open-ended fund, also known as an "evergreen" fund, which has an infinite life and can accept investments throughout its lifespan.
As a result of these differences, closed-end funds are often used for opportunistic or value-add opportunities where the defined strategy is to buy, fix/develop, and then sell, whereas open-ended funds are often used for core opportunities, where the assets are intended to be held indefinitely for income. Neither fund structure is inherently good or bad; each has its benefits and drawbacks.
However, the perceived weighting of these benefits and drawbacks shifts during market cycles. Since global real estate markets started to turn downward in 2022, the ability to be patient and think long-term has become a key ingredient for survival. You may have done everything you said you would do perfectly, but the market may not be there to grant you the liquidity you had originally planned for.
Now the question becomes: How patient can and should we be?
In my opinion, the greatest opportunities exist for (1) the larger firms that have a strong balance sheet and defensible income-producing properties and (2) the smaller, nimble firms that can capitalize on the dislocation in the market (and aren't overly burdened with legacy assets that are sucking up resources and capacity).
This perspective is true of other sectors as well. This weekend, venture capitalist Chris Dixon of a16z wrote a post titled, "
The bull case for ETH is that it will simultaneously become (1) the mandatory collateral and fuel for a new financial system, and (2) a deflationary asset, where more ETH is generally getting burned than is being created to reward network validators. Whether this will happen and boost the price of ETH, of course, remains to be seen. But in my view, the writing is very obviously all over the wall. Stablecoins have become part of the mainstream. The question is: where will all the value accrue in this new world?
Cover photo by Kanchanara on Unsplash
The fact that he wrote this post says a lot, I think, about the psyche of investors today. The perceived weighting has changed, and people are now investing and building more for the future. As the late Charlie Munger once said, "The big money is not in the buying and the selling, but in the waiting."
Cover photo by KAi'S PHOTOGRAPHY on Unsplash
The bull case for ETH is that it will simultaneously become (1) the mandatory collateral and fuel for a new financial system, and (2) a deflationary asset, where more ETH is generally getting burned than is being created to reward network validators. Whether this will happen and boost the price of ETH, of course, remains to be seen. But in my view, the writing is very obviously all over the wall. Stablecoins have become part of the mainstream. The question is: where will all the value accrue in this new world?
Cover photo by Kanchanara on Unsplash
The fact that he wrote this post says a lot, I think, about the psyche of investors today. The perceived weighting has changed, and people are now investing and building more for the future. As the late Charlie Munger once said, "The big money is not in the buying and the selling, but in the waiting."
Cover photo by KAi'S PHOTOGRAPHY on Unsplash
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