Private Investment Valuations Lag the Market. Two Sigma’s Venn Wants to Change That.

The firm has launched a de-smoothing tool in its risk analytics platform to show the true volatility of private market returns.

Illustration by II

Illustration by II

Among allocators and investment managers alike, few topics are hotter these days than private market valuations.

Notoriously lagging their public market peers, private managers report returns on a quarterly basis. During the recent market downturn, private investment valuations have appeared to hold up — although some sources predict that the market correction will eventually come for the private markets, too.

In the meantime, Two Sigma’s Venn is trying to solve the lag problem using its risk management and portfolio analytics platform. The firm announced on Wednesday that it is launching a tool designed to “de-smooth” private market returns and make it easier to compare their volatility, risk, and returns to their public market counterparts.

“Really, the idea here is [that] private assets are becoming more and more popular, and as a result, investors are starting to realize the significant data challenges,” said Two Sigma vice president Chris Carrano, via Zoom. “They’re marked to valuation; they lag the market. This makes it really difficult to incorporate them into holistic portfolio analysis.”

Venn uses an econometric model pioneered in 2003 by researchers Mila Getmansky, Andrew Lo, and Igor Makarov that de-smooths private market returns. The goal is to reduce the lag in private market performance reporting, allowing users to mark their private equity investments to market.


When Venn uses that model, returns can appear more volatile, and may become more correlated to their public market peers. Venn’s factor lens might show that these assets have less unexplainable risk.

“Smoothed private asset returns represent an unnatural market process that leads to larger amounts of unexplainable risk,” according to a blog post published Wednesday by the firm. “De-smoothing may reduce this unexplainable risk.”

The technology also uses public market proxies to create estimated daily returns for the private assets, according to the announcement. It then allows allocators to convert quarterly private asset returns into a daily return series that they can compare to public returns.

“Take private real estate, for example,” Carrano said. “It lagged the public market rally heavily in 2009.” Venn used the NCREIF Property Index as a private real estate proxy and the MSCI U.S. REIT as its public market peer as a way to compare performance during that rebound period.

Venn showed that without any de-smoothing, it would appear that private real estate began to rebound roughly two quarters after the public index. Volatility during that period was also wildly different — the private proxy displayed volatility of 4.22 percent, while the public index showed 20.51 percent.

“We de-smoothed that return stream, and now you can see [that] private and public real estate rallied together in 2009,” Carrano said. “It’s been an eye-opener for people. Of course, they should rally together.”

In the end, Venn’s goal is to help allocators better compare and contrast their public and private market investments.

“Venn’s private asset features help put private investments in a better context in a holistic portfolio,” Carrano said. “Now you don’t have a section of the portfolio that’s lagging public markets or reporting quarterly.”