In recent years, asset managers have launched dozens of products that provide retail investors with access to private market investments. Sponsors are promoting these funds as a way to “democratize” private markets and give savers an unprecedented opportunity to diversify their portfolios and earn attractive returns. In this paper, I explore the rise of these “retail private funds” and show that they present substantial risks to retail investors. I highlight these risks by analyzing the funds’ legal structures and data collected from their public filings.

First, I present evidence that retail private funds, like traditional private funds, report very low return volatility that understates their risks. However, unlike private funds, these funds admit retail investors and offer periodic liquidity at their reported net asset values, so their underreported volatility presents greater investor protection concerns than private funds’. Second, I provide suggestive evidence that funds sold only to wealthier investors perform better on average than funds sold more broadly. This performance gap raises the possibility that products with poor performance are being channeled to investors who are less wealthy and less financially sophisticated. I conclude by discussing ways that policymakers could improve retail investors’ investment options and give them the information they need to make informed decisions by altering funds’ disclosure practices and improving sponsors’ incentives.

To read the full paper, authored by Ben Bates, a research fellow with the Harvard Law School Program on Corporate Governance, click here.