Rev. Date July 18, 2023
Interpolation
What is the purpose of interpolation on Venn?
Interpolation allows you to increase the return frequency from quarterly to daily for your private asset allocations. The two main benefits of interpolation include:
Private asset returns tend to be smoothed because of the illiquidity of the asset class, leading to artificially low volatility. Interpolating private asset data will provide you with what we believe to be a more accurate representation of the true risk of these types of allocations, by returning risk that is closer to that of the public market proxy index.
The ability to analyze your total portfolio, inclusive of private assets, without losing the benefits of having more frequent data for investments that are not private assets. Previously, quarterly returns would have shifted all of the investments in your portfolio, regardless of their original frequency, to quarterly as well. This would then necessitate having 3+ years of full portfolio history to run factor-based analyses on Venn.[1]
How can I interpolate my private asset returns on Venn?
First, gather the historical quarterly returns for your private asset allocation by major category (according to the categories in the table below). Upload the returns to Venn. Once the upload is complete, open any analysis of that private asset allocation. In the top right of the analysis page, click “Interpolate” and select a private asset category or an investment of your choice to be used for interpolation.
How does Venn interpolate my private asset allocations?
After you upload your quarterly private asset return series, here are the basic steps of interpolation:
If you select a private asset category, Venn finds the public market proxy index for the selected category.[2] See the table below for the mapping. You may also select any investment or index from the data library to use as a custom proxy, including user-uploaded data and composite benchmarks.
For each quarter, Venn will calculate a daily constant return that, when added to the public market proxy index’s daily returns, will yield a quarterly return that appears to closely match the quarterly return you uploaded for that private asset.
The result is a daily return series with returns that we believe will closely match those of your original private asset return series and with volatility that roughly matches that of the public market proxy index.
Extrapolation
What is the purpose of extrapolation on Venn?
Extrapolation seeks to provide users with an estimate of the updated value of their private asset allocation. Because many private asset funds report their valuations on a meaningful lag, Venn will help fill the gap between the last reported valuation date and today by estimating its valuation.
How does Venn extrapolate my private asset allocations?
After you upload your private asset return series, here are the basic steps of extrapolation:
User selects a private asset category or a public market proxy. See the table above for Venn’s suggested proxy mapping for each private asset category. You may also select any investment or index from the data library to use as a custom proxy, including user-uploaded data and composite benchmarks.
For quarterly private asset returns, Venn performs interpolation to generate the daily or monthly interpolated return series, depending on the data frequency of the proxy chosen.
Venn runs an Ordinary-Least-Squares regression of the interpolated private asset returns on its public market proxy index. For daily or monthly returns, regression of the original investment return series is run, and for desmoothed investments, regression of the desmoothed returns is run on the selected proxy.
Venn will then extrapolate from the last reported return to today using the in-sample beta coefficient from the regression multiplied by the out-of-sample returns of the public market proxy index, plus the in-sample intercept (i.e., residual).
Where can I see extrapolation on Venn?
The extrapolated returns will extend the analysis period of the subject investment and will be used in all analyses for the investment.
Please note that proxy extrapolation is different from Venncast, which uses factor-based extrapolation[3], and is only displayed in the Cumulative Return chart and does not extend an investment or portfolio’s analysis period.
This feature is currently available on a limited basis for certain Venn users. Please reach out if you have any questions.
How far out can Venn extrapolate my investment returns?
Venn will extrapolate returns from the end date of the original investment’s returns to the current date, up to 6 months beyond the end date of the investment returns.[3]
If the select proxy does not have recent returns data, Venn will extrapolate the investment returns up to the end date of the proxy returns.
Limitations and Data Requirements
What are the limitations of interpolation and extrapolation on Venn?
Any Venn user can analyze a single interpolated and/or extrapolated return series based on their uploaded returns but should keep in mind that the results, especially as it relates to risk measures like volatility and factor exposures, will depend heavily on the category and therefore the public market proxy index selected.
Interpolation and extrapolation can help quantify the likely risk of an overall private assets allocation (or subsets by category) to show how it fits within the rest of a multi-asset class portfolio.
In general, we believe these methods are best used when evaluating an entire private asset allocation in a specific category, such as Buyout or Venture Capital, and are most accurate when the allocation is “mature” (hence the data requirements below). This higher-level categorical analysis will tend to be less affected by the early negative returns of individual funds (i.e., J-curve effects) and will also have steadier value through time than individual funds.
What are the minimum number of data points required for interpolation and extrapolation on Venn?
For interpolation, Venn requires a minimum of 3 years or 12 quarterly returns.
For extrapolation, the minimum overlapping data between the subject investment and select proxy must be:
12 quarters for quarterly data
24 months for monthly data
3 months for daily data
If the investment does not have at least the minimum number of data points required, interpolation or extrapolation will be disabled.
Which investment or index can I use as a proxy for interpolation or extrapolation?
Assuming the proxies have at least the minimum number of data points outlined above, you can select any investment or index from the data library to use as a custom proxy, including user-uploaded data and composite benchmarks, that meets the data frequency requirements below.
For interpolation, if the private asset series does not have a meaningful and reliably positive relationship with the select public market proxy, a warning message will be displayed but the user will have the option to continue using the select proxy to enable interpolation.
For a proxy to be considered to have a meaningful positive relationship with the investment, the following condition must be met:
Correlation must be greater than 0.4 [4]
Proxies are for estimation purposes only and have many inherent limitations. The methodology for calculating potential proxies was chosen in our professional judgment, and will not always yield the most accurate available proxy. Our potential proxy suggestions are not a recommendation as to any portfolio, allocation, strategy, or investment nor an offer to purchase or sell any security. We suggest users do their own research to use the public proxy that best fits their own use case.
[1] See How much data is required for factor analysis on Venn? for more information.
[2] Categories for the private asset categories were guided by research from Andrew Ang, Bingxu Chen, William N. Goetzmann, and Ludovic Phalippou (2014) in addition to research by Two Sigma.
[3] Quarterly interpolated investments will be Venncasted using the proxy-based extrapolation method outlined in this document when extrapolation is turned off.
[4] Monthly investments can only be extrapolated if the return end date is more than 1 month out from today’s date. The extrapolation period may be constrained by factor returns availability.
[5] For interpolation with desmoothing, correlation between the desmoothed private asset series and the underlying public market proxy must be greater than 0.4.
This document highlights certain aspects of this feature. As an overview, it does not discuss all material facts or assumptions. Please see Important Disclosure and Disclaimer Information.