Beta replication has become a mainstay in the hedge fund world. But Nomura Holdings doesn't see any reason why it shouldn't also work for the less-liquid world of private equity.
The Japanese bank has launched an investible private equity index. The new benchmark—which Nomura hopes to license to exchange-traded and mutual fund managers—will seek to replicate private equity returns by buying in sectors favored by buyout firms.
"Research indicates that if we know when buy-out managers invest and divest in various companies, the value can be captured by investing in similar publicly-traded securities," Matthew Peakman, Nomura's head of fund derivatives trading, explained to the Financial Times.
Peakman said that private equity funds usually aim to outperform public equities by between 5% and 8% annually. Products based on the new index would be marketed primarily to institutional investors.