[Week 13 of 2026] Premiums, Proxies, Payments

Welcome back to Price and Prejudice with a few musings from Week 13 of 2026. Now that the Capital Markets & Investments class at Columbia is in progress, the blog will also reference to some contents from class as well.

Paying for Pain

Cliff Asness, with whom I share two alma maters, has been the loudest critic of private markets for the better part of a decade, and he recently put out a post clarifying his position. He writes that he's not calling a crash or timing a downturn but rather making a simple point that private equity and private credit carry real volatility that gets hidden by infrequent marking, a practice he calls "volatility laundering." When your statement only updates quarterly and your manager has discretion over the marks, the asset looks stable. But looking stable and being stable are different things.

The more interesting claim is about the illiquidity premium, the idea that investors demanded extra return for locking up their capital. But Asness argues that now investors treat illiquidity as a feature because smooth reported returns look great on quarterly statements and make risk management conversations easier. And if investors are willing to pay for the privilege of not seeing their losses in real time, they should expect to pay more. One way to test whether this is actually happening: look at whether fund terms are getting worse (higher fees, longer lockups, more manager-friendly provisions) even as record amounts of capital flow in. That pattern, investors accepting worse terms for the same product, would be consistent with a market that's paying for smoothness rather than being compensated for risk.

Perhaps this is a selling point for retail investors – the behavioral finance literature is unambiguous that frequent trading destroys returns. People panic-sell at bottoms, chase momentum at tops, and generally do worse the more often they touch their portfolios. Lockups force you to sit still, and they conveniently work as commitment devices. The "bug turned feature" story might be wrong for sophisticated institutions that are gaming their own reported volatility, but accidentally right for retail investors who need protection from themselves.

Marking to Reality

MSCI recently launched a set of indices that provide daily NAV estimates for private equity and private credit. The methodology stitches together cash flows for nearly 10,000 funds, historical valuations, and statistical models to estimate what private assets are worth between quarterly reporting cycles. You can think of it as filling in the gaps on a connect-the-dots drawing, where the dots are quarterly marks and lines are MSCI's best guess at what happened in between.

The irony is hard to miss, where Asness's entire argument is that investors have come to like the fact that private assets don't get marked daily. Smooth returns are the product! So the question is who really wants this. Risk managers and regulators are obvious candidates, but GPs who market smooth returns and allocators whose jobs depend on low volatility might not want them. It'd be curious how MSCI sells transparency to an industry that has, in many ways, been selling opacity.

Ketchup Defaults

Here's another excellent primer from the Financial Times, walking readers through pretty much everything you need to know about credit markets in one sitting. It covers what credit is, how ratings work, why spreads exist, and why credit investors are almost always overpaid for the risk they take.

The part that's relevant for anyone actually investing in credit, and also the trickiest, is the defaults. The article makes the point that defaults "flow like ketchup": nothing for a while, then a lot at once. And the clumping tends to happen within sectors. In the early days of European high yield, issuance was dominated by telecom and cable companies. When the music stopped in 2002, over 80 percent of European cable debt defaulted by value, and half of European telecom debt followed. The only you could have survived is if you were diversified across sectors.

Private credit investors should probably re-read that paragraph. Much of the recent growth in direct lending has gone to fund leveraged buyouts of software and tech-adjacent companies. If AI disruption hits these borrowers the way the internet bust hit European cable, the losses won't be spread evenly. They'll show up in exactly the funds that grew the fastest. And unlike public high yield, where you could at least try to sell at 91 cents on the dollar (the going rate for a junk bond ETF in October 2008, per the data in the article), private credit investors may find there's no bid at all.

Nota Bene

• I recently built this app called Turtl (https://turtl.finance/learn) that I (and my students) use to catch up with recent news and podcasts in finance. Feel free to try it out if you don't have time to read through all the substacks and newsletters!