Venture Investing Has No Correlation With Public Markets
An article we liked from Thought Leader Abe Othman of AngelList:
Innovation isn't Correlated with the Markets
AngelList data isn’t the only source that suggests venture returns and the public markets are uncorrelated.
Portfolio theory suggests that making investments in uncorrelated assets could substantially lower the risk that investors must shoulder to achieve their desired investment returns. Unfortunately, one well-known complication with portfolio optimization is that it is very challenging to predict the future correlations between asset classes. For instance, Russell Investments data suggests that over the past 30 years, the correlation between stocks and bonds has shifted from modestly positive to modestly negative in most years but with occasional sharp reversals.
Invesco’s whitepaper The Case for Venture Capital features an astonishing result casually tucked away in a table on the second page: that the correlation between venture capital returns and large-cap equity returns is actually slightly negative, at -0.06. This was a surprising result because we would expect to see a positive correlation. For example, startup exit values such as IPO prices are highly dependent on public market valuations.
Fortunately, AngelList Venture makes so many early-stage investments—we participated in the seed rounds of more than 1,500 startups in 2019—that we can examine the recent correlation between public markets and early-stage venture using our internal data. The below figure shows the gross returns1 of the AngelList seed portfolio on a monthly basis against the performance of the Nasdaq Index from January 2015 through March 2020. Results from the first quarter of 2020 are shown in pink.
The correlation between these two time series is 0.0, totally consistent with Invesco’s original finding.
An obvious rebuttal is that it is unrealistic to expect simultaneous changes between public and private markets. Instead, a more accurate model of the world could be that the public markets do well or poorly, and that performance is then reflected gradually, perhaps over the next twelve months, in the private markets as companies get priced up or down when they...
Read the rest of this article at AngelList.com...
Thanks for this article excerpt and its graphics to Abe Othman, the Head of Data Science, of AngelList.