Long-horizon investors have an edge. Sadly, they too often squander their advantages. That is often caused by shortcomings in their own governance structure and lack of alignment with their delegated managers. We discuss these issues in our paper, Investing for the Long Run, which was recently made publicly available on SSRN.

Long-horizon investors have the ability to reap risk premiums that are noisy in the short run and only manifest over the long run. They can acquire distressed assets when investors with over-stretched risk capacity have to sell. They can also pursue opportunities to invest in illiquid assets. The paper describes two pitfalls that hinder long-horizon investors in fully exploiting their advantage: procyclical investing and misalignment between asset owners and managers. These are intertwined. Counter-cyclical investing requires strong governance structures to withstand the temptations of selling in blind panics when asset prices drop. Agency conflicts contribute to procyclical investment behavior.

(more…)