Which in a way would support his main point more strongly: venture returns are inevitably coming down from 12% to 7 or 8% annually.
Beating the market is tough.
- 76.7% over the last 10 years (5.87% annualised)
- 90.0% since inception 15 years ago (4.3% annualised)
That is very far from 8% - at that rate with compound interest you'd have gotten 217% of returns from VTI over 15 years.
I agree. It's true that most VC funds have poor returns but so do most hedge funds and most mutual funds. I don't know the success statistics offhand for private equity (Carlisle Group, Blackstone, etc)
How do VC funds compare to all other types of actively managed funds?
Even Warren Buffet's Berkshire Hathaway "only" had returns of ~9.6% (not 12%) annualized return from 2005 to 2015[1] which stated that $1000 invested 10 years ago grew to $2496 (~2.5x).
[1]http://www.businessinsider.com/warren-buffett-berkshire-hath...
The relative risk would be a function of factors like the volatility of the asset class (the higher the volatility, the higher the return required), or the liquidity (the longer the money is locked-in, the higher the return required), etc.
Up until 10-15 years ago, it was common to refer to return targets for a certain asset class as a multiple of risk-free rate (what government bonds yield), eventually, when the risk-free rate started converging to zero, it became more common to refer to return targets as risk free rate + X.
So, for example, a simplified ranking from the lowest to the highest return could look like this: - government bonds - AAA-rate corporate bonds - US equities - international equities - risk-neutral hedge funds - macro hedge funds - private equity funds - real estate funds
Whereby you would have the first half of the list generating single digit yearly returns (say, 8% for US equities), and the bottom of the list generating double-digit returns (say, 15% for risk-neutral hedge funds and 20% for private equity). This is just an example - with realistic numbers.
One of the implications of the above is NOT that private equity investments are better than US equities, or real estate investments are better than hedge funds: they have different risks, so they have to deliver different returns in order to be EQUALLY attractive.
Also, consider that there are many types of hedge investing and private equity strategies, each with different risk factors and target returns.
Correlations are another important factor: they measure how the return of a certain asset class moves relative to the others (what happens to your returns when US equities returns are negative?)
In order to increase their assets, VCs have to justify to their investors the returns they target vs. the risks they ask their investors to undertake. That's not easy for all VCs.