[Week 17 of 2026] Indexes, Incentives, Illiquidity

Welcome back to Price and Prejudice with a few musings from Week 17 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.

From Thesis to Trillions

Vanguard published a nice history of index investing marking the anniversary of the First Index Investment Trust, launched in 1976. The article walks through the history from Vanguard's perspective, and it doubles as a tour of much of what we covered in class: the cost drag on returns, the rise of ETFs, the central role of indexing in retirement plans. There were also a few facts I didn't know, like the fact that Vanguard has trademarked "The Vanguard Effect," which is a phrase used to describe how the firm's competitive pressure dragged down fees across the industry.

What's fascinating is the gap between the idea and the implementation. The intellectual case for indexing was essentially settled by the early 1970s, and the hard part was building an actual investable product and getting people to put real money into something that. The article mentions how Bogle hoped to raise $50–150 million in the initial offering but instead got $11 million. The financial press described indexing as "a 'cop-out' and a fad that will soon disappear" probably didn't help either.

Another statistic from the Vanguard piece that stuck with me is that there are now roughly 6,700 equity index benchmarks globally, spanning regional, sector, style, country, and factor cuts. There's also probably an order of magnitude larger number of funds competing to track them. So there's a separate question of whether a world with 6,700 benchmarks is really a world where investors are choosing "the market." (I can imagine this being the subject of a new Borges novel).

The Adviser Tax

This FT article documents how 16 private capital funds, including those managed by Blackstone, Blue Owl, Apollo, and KKR, have paid more than $2bn in servicing fees to wealth advisers since 2017, before placement fees and commissions. The fee structure is layered: servicing fees of 0.25–0.85% annually, placement fees of around 0.5% on the initial investment, and upfront commissions averaging around 2%. We'd like to think that the advisers are bound by fiduciary duties and are not incentivized by fees, but the return data is harder to square with that framing.

The arrangement makes obvious economic sense for both sides. Private capital firms need distribution, and individual investors represent a vast pool of capital that institutions can't fully absorb. Wealth advisers are the gatekeepers to that pool. So paying 2% upfront plus 0.5–0.85% annually is essentially a distribution tax, and for a fund raising $50–100 billion, it's a relatively small cost of doing business. For the advisers, the economics are equally attractive: servicing fees are recurring, private credit is harder for clients to exit than a mutual fund, and the revenue is sticky. "Access" to exclusive private market investments is also a tangible pitch to wealthy clients who feel they're missing out.

Whether retail investors came out ahead is a harder call than the fee story alone suggests. For investors who genuinely wanted private credit exposure and had the time horizon for it, access through a wealth adviser was better than no access at all. But the downside is also real: the 1–1.5% annual fee drag compounds significantly over time, and the high upfront commissions attract advisers who push the product regardless of client fit. And these fees probably change which clients get recommended the product in the first place.

Recursive Liquidity

This blog introduces the recent introduction of a "tertiary" fund: a vehicle that buys limited partnership interests in secondary funds, the same way secondary funds buy LP interests in primary funds. These exist because secondary fund LPs who want to exit midway through a fund's term face the same problem primary fund LPs face.

The structural issue is that secondary funds, which were created to solve the illiquidity of primary funds, are also ten-to-twelve-year limited partnership, governed by the same capital commitment rules and transfer restrictions as the primary funds. This pattern of layering also shows up in other parts of finance, most notably in structured credit: CDO-squared vehicles packaged tranches of existing CDOs, inherited their opacity and exit difficulties, and amplified them.

The CDO parallel is worth pressing on. CDO-squared vehicles were built on the logic that packaging tranches of CDOs reduced risk through diversification. But in practice, the additional layer made it nearly impossible to assess the underlying exposures, and the correlations that were supposed to insulate the structure turned out to be far higher under stress. The tertiary market is smaller and unlevered, but the information problem is similar: each layer away from the underlying asset, the claim becomes harder to price and more dependent on the specific relationship between buyer and seller. For now, the article characterizes it more as a curated niche, but this probably adds to the growing list of worries that the regulators keep a tap on.