A significant amount of capital is earmarked in funds designed to deploy only when credit spreads widen past a specific threshold (e.g., 650 bps). This creates a powerful, self-reflexive floor, causing spreads to snap back quickly after a spike and preventing sustained market dislocations.

Being counter-cyclical is effective, but jumping into unfamiliar distressed assets is risky. The key is to invest in familiar managers or sectors during a crisis, leveraging pre-existing knowledge rather than reacting to new information under pressure.

Holding significant cash is often seen as defensive. However, its primary value is offensive. It provides the optionality and capital to acquire high-quality assets from panicked or forced sellers at deeply discounted prices during a liquidity crisis. The goal is to be a buyer when everyone else must sell.

Beyond yield premiums, illiquidity imposes a major opportunity cost: the inability to rebalance. When one asset class soars, liquid investors can sell and reallocate to cheaper assets. Heavily illiquid investors are stuck, forfeiting valuable strategic portfolio shifts.

Brookfield prioritizes liquidity, believing it's overvalued in good times and incredibly undervalued in bad times. Maintaining excess capital provides a crucial advantage, allowing them to weather downturns and seize opportunities when others are capital-constrained, which has been a key differentiator across cycles.

A key benefit of alternative investments is that their illiquidity prevents investors from making emotional, panicked decisions during market downturns. This structure forces them to "stay the course," avoiding the common pitfall of selling at the bottom.

The once-revolutionary strategy of heavy allocation to private assets, pioneered by Yale's David Swenson, has been so widely copied that it has lost its edge. Gurley argues this 'mimic effect' has led most endowments to be over-invested in illiquid private equity and venture funds with potentially inflated, stale valuations.

Institutional allocators are currently over-allocated to illiquid private assets due to the denominator effect. When distributions from these funds finally resume, the initial wave of capital will be used to rebalance portfolios back toward public markets, not immediately recycled into new private equity commitments, a trend private GPs may not see coming.

With a small team, you cannot be an expert in everything. VCU's strategy embraces this by consciously deciding which areas to ignore (e.g., China, private credit). This 'anti-portfolio' approach forces deep focus in the few areas they do choose, turning a resource constraint into a strategic advantage.