How VC Fund of Funds Outperform the Market and Reduce Risk

By: Gridline Team | Published: 04/29/2022
Est. Reading Time:
3 minutes

Few industries have been as tribal and opaque as venture capital. For years, the VC world was a mystery to outsiders, with its language and customs. But in recent years, there has been a growing effort to make the industry more transparent.

A recent study published by the National Bureau of Economic Research (NBER) sheds new light on how VC fund of funds outperform the market and reduce risk. The study found that the average VC fund of funds generated net returns that outperformed the S&P 500 and Russell 2000 PMEs.

VC Outperforms Public Markets

Today’s stock market is in a record bull run, but that doesn’t mean there aren’t risks. Many experts believe we are overdue for a market correction.

After all, periods of exuberance in public markets are punctuated by years of lethargy as performance reverts to the mean. For instance, in the decade after the dot-com crash, the PME index annual return dropped to 0.08%, while private equity maintained a 7.5% average.

This is because VCs are more likely to invest in companies with high potential growth. As the NBER study confirms, company-level returns within a specific VC fund follow Pareto’s Principle: 20 percent of the companies within a fund generate 80 percent of returns.

In other words, VCs are more likely to generate returns by investing in a small number of high-growth companies. This is why VC funds outperform the market during bull markets and experience less severe corrections during bear markets.

Moreover, it’s not just top-quartile VC funds that outperform the market. The NBER study found that “VC funds in the 2nd quartile also have PMEs above 1.0, overall and for both pre-2001 and post-2000 vintages.” This means that, on average, you are better off investing in a mediocre VC fund than a publicly-traded market index.

VC Fund of Funds Reduce Risk

The premise of diversification is simple: don’t put all your eggs in one basket. And yet, many investors still don’t diversify their portfolios enough.

One way to diversify is to invest in a VC fund of funds. These investment vehicles invest in various VC funds, reducing the risk of any fund underperforming.

The NBER study found that the average VC fund of funds outperformed the market by a wide margin. Not only have buyouts “consistently outperformed public markets with the average PME being 1.20 across the sample,” but “VC funds, overall, also have out-performed public markets with the average PME of 1.22 across the sample.”

This is likely because these vehicles have access to a large pool of capital and can invest in more companies than most individual investors.

In addition, VC fund of funds are more likely to generate returns by investing in a small number of high-growth companies. VC investing is risky at the company level, but it is lucrative at the portfolio level.

The Bottom Line

The NBER study reiterates what many experts have long known: venture capital is a smart investment strategy for those who can stomach the risk. For those who want to reduce their risk, investing in a VC fund of funds is an ideal way to diversify your portfolio and get exposure to the top performers in the industry.

But what about the average investor? Can they still benefit from this strategy? The answer is a resounding yes. With a Gridline Thematic Portfolio product, you can invest in 5 to 10 institutional-grade VC funds for just $100,000. This allows you to achieve the same level of diversification and exposure to top performers as the wealthiest individuals and endowments.

So don’t miss out on this opportunity to supercharge your portfolio. Invest in a VC fund of funds today.

Download this article for later.
Sed ut perspiciatis unde omnis iste natus error sit voluptatem accusantium doloremque.
Share this Article
Terms of Service | Privacy Policy | GLBA Notice

This site is operated by Gridline Holdings, LLC ("Gridline"). Gridline does not give investment advice, endorsement, analysis or recommendations with respect to any securities. All securities listed here are being offered by, and all information included on this site is the responsibility of, the applicable issuer of such securities. Gridline has not taken any steps to verify the adequacy, accuracy or completeness of any information. Neither Gridline nor any of its officers, directors, agents and employees makes any warranty, express or implied, of any kind whatsoever related to the adequacy, accuracy or completeness of any information on this site or the use of information on this site. By accessing this site and any pages thereof, you agree to be bound by the Terms of Service and Privacy Policy

Past performance is not indicative of future results. All securities involve risk and may result in significant losses. Investing in alternative investment funds is inherently risky and illiquid, involves a high degree of risk, and is suitable only for sophisticated and qualified investors. Investors must be able to afford the loss of their entire investment. Alternative investment funds should only be part of an investor’s overall investment portfolio. Further, the alternative investment fund portion of an investor’s portfolio should include a balanced portfolio of different alternative investments. Investments in alternative investment funds are speculative and involve a high degree of risk and those investors who cannot afford to lose their entire investment should not invest. Additionally, investors may receive illiquid and/or restricted securities that may be subject to holding period requirements and/or limited liquidity. Investments in Alternative investment funds are generally highly illiquid and those investors who cannot hold an investment for the long term should not invest.

Any specific alternative investments funds referenced on this site are included purely for illustrative purposes and selected based on name recognition. Such examples are only partial, and readers should not assume that the investments identified were or will be profitable or are representative of investments by the alternative investment funds identified on this site. There is no guarantee that any alternative investment fund will achieve the same exposure to, or quality of, investments held by any existing fund referenced on this site.

Nothing on this page shall constitute an offer to sell or a solicitation of an offer to buy an interest in any investment partnership or other security. Any offer to sell or solicitation of an offer to buy an interest in an investment partnership may be made only by way of the partnership's final definitive confidential disclosure document and other offering and governance documents of any given fund (collectively, “Offering Documents”). The information on this site is qualified in its entirety and limited by reference to such Offering Documents, and in the event of any inconsistency between this site and such Offering Documents, the Offering Documents shall control. In making an investment decision, investors must rely on their own examination of the offering and the terms of any offering. Investors should not construe the contents of this site as legal, tax, investment or other advice, or a recommendation to purchase or sell any particular security.

The information included in this site is based upon information reasonably available to Gridline. Furthermore, the information included in this site has been obtained from sources Gridline believes to be reliable; however, these sources cannot be guaranteed as to their accuracy or completeness. No representation, warranty or undertaking, express or implied, is given as to the accuracy or completeness of the information contained herein, and no liability is accepted for the accuracy or completeness of any such information. This site may contain certain “forward-looking statements,” which may be identified by the use of such words as “believe,” “expect,” “anticipate,” “should,” “planned,” “estimated,” “potential,” “outlook,” “forecast,” “plan” and other similar terms. All such forward-looking statements are conditional and are subject to various factors, including, without limitation, general and local economic conditions, changing levels of competition within certain industries and markets, changes in legislation or regulation, and other economic, competitive, governmental, regulatory and technological factors, any or all of which could cause actual results to differ materially from projected results.

© 2023 Gridline Holdings, LLC