October 9, 2025

Episode 378: Mark Higgins - Learning from Market History

October 9, 2025

Mark serves as a senior vice president for IFA Institutional. Mark specializes in providing advisory services to institutional plans and select high-net-worth individuals. Mark is also the author of the award-winning book, Investing in U.S. Financial History: Understanding the Past to Forecast the Future. The book recounts the financial history of the United States, beginning with the innovative financial programs of Alexander Hamilton in 1790 and ending with the Federal Reserve’s ongoing battle to contain inflation in the 2020s.

Mark is a member of the Editorial Board of the Museum of American Finance and is a frequent writer for the Museum’s Financial History magazine. He graduated from Georgetown University Phi Beta Kappa and Magna Cum Laude with a bachelor’s degree in English and Psychology. He received an MBA from the Darden School of Business at the University of Virginia. He is a CFA charterholder and CFP® professional.

In this episode, we are joined by Mark Higgins, an award-winning author and institutional investment advisor, to discuss the power and importance of studying US financial history. Mark brings his wealth of knowledge as a financial historian to the show as he shares the value of studying financial history, the role the financial system plays in the overall success of the US, and the impact Alexander Hamilton made on the country. We unpack government debt, the concerning levels of it in America, and the impact of having a central bank before discussing what happens, historically, when a bank is unregulated. Mark describes some early warning signs of a bubble, touches on the historical origins of flawed financial practices, and shares some important lessons we can learn from the history of the US financial system. Hear all about alternative asset classes, evergreen funds, and red flags in the private market. Finally, our guest tells us how he defines his own personal and professional success. This conversation sheds light on the history of finance in the USA and how we can learn from it, so be sure to tune in now!

Key Points From This Episode:

(0:00:00) An introduction to Mark Higgins and an overview of today’s topics of discussion.

(0:04:16) The value of studying financial history and the role the financial system plays in the USA as a whole.

(0:06:33) Why Alexander Hamilton stands out in US financial history and the importance of government debt.

(0:09:29) Mark discusses the concerning debt levels in America and the impact of having a central bank.

(0:12:29) What happens when banking is unregulated, and key themes across major US financial depressions.

(0:16:48) Some early warning signs of a bubble and the problematic nature of speculation and comparison.

(0:19:42) Historical parallels for crypto and meme stocks and the historical origin of flawed practices in the investment industry.

(0:24:27) Mark shares some of the most important lessons we can learn from US financial history and what we may have to relearn in the future.

(0:27:41) Alternative asset classes, why so much has been allocated to them in recent history, and how modern portfolio theory is abused in the promotion of alternative investments.

(0:33:56) Mark shares his thoughts on ‘evergreen funds’, why they are so flawed, and their effects.

(0:39:51) The biggest red flags in private markets today and what he thinks will happen if retail starts taking up private assets.

(0:43:03) How often Mark sees institutions being sold alternatives, and why trustees of these institutions have to be different.

(0:49:23) Mark tells us how he defines success in his life on a personal and professional level.

Read The Transcript:

Ben Felix: This is the Rational Reminder podcast, a weekly reality check on sensible investing and financial decision-making from two Canadians. We are hosted by me, Benjamin Felix, Chief Investment Officer, and Cameron Passmore, Chief Executive Officer at PWL Capital.

Cameron Passmore: Welcome to episode 378. And Ben, I got to hand it to you. Another week, another great guest. And it's so much fun to dive into financial history and how sometimes – what's the old saying? It may not be the same tune, but it kind of rhymes the same way. This week's guest, you found Mark Higgins, who joined us. Wow, what a great conversation and a real candid take in a lot of things that are happening in the industry these days. Tell us the backstory.

Ben Felix: The backstory is that a mutual contact that Mark and I have told me that I've got to go look at his stuff. I went and looked him up. And between his book, his writing, he's done some other podcast, but not a ton, and he's done a few things for the CFA Institute, I was like, "Oh man, he's just a perfect guest for our podcast," because he's got a great historical perspective, which, as listeners know, we thoroughly enjoy. And he's also got some very strong but well-founded opinions on the big boom that we've seen in recent history in private asset classes like private equity and private credit, venture capital. That's all interesting.

And then in a professional capacity, he works with institutional clients at IFA, which is Mark Hebner's firm. People may remember Mark Hebner from back in episode 116. So you add all that stuff up together, the deep historical perspective, the research that he did for his book, which I'll say more about in a second, and his work with institutional clients. He's just got such great real perspectives. He's got the historical perspective and also the practical, this is what people are doing, this is why they're doing it perspective. As soon as I figured out what he had going on, I was like, "Oh man, we have to get him on as a guest." And here we are. That's kind of the backstory.

Cameron Passmore: Awesome. Mark is a senior vice president for IFA Institutional. So he works with institutional plans, such as endowments and foundations. But he also works with some high-net-worth clients. And interesting contrast in convincing different types of clients to invest in index funds or not, and the challenges around that, I thought that was really interesting.

Ben Felix: Oh yeah, his comments on the difference between talking to a high-net-worth retail investor and an institutional investor with an investment committee. The relative responsiveness to the concept of index funds for those two groups, which I've seen personally. And hearing him talk about it from his experience was super interesting.

Mark is also the author of the book Investing in US Financial History: Understanding the Past to Forecast the Future. So this book recounts the financial history of the United States starting with the innovative financial programs of Alexander Hamilton who Mark talks about as sort of a very important historical figure for the US financial system, specifically in 1790. And then the book ends with the Federal Reserve's ongoing battle to contain inflation today, or at least in very, very recent history. It's a really cool book, great idea for a book. He's really synthesized a lot of other writing and research into one very readable place.

Cameron Passmore: He's also a member of the Editorial Board of the Museum of American Finance. And he's a frequent writer for the museum's financial history magazine.

Ben Felix: Cool. I think that's good for an intro. I think people will enjoy this conversation. It starts with the historical perspective, and then we move on to alternative asset classes, where Mark has some great thoughts and opinions. And then a little bit about his experience in institutional asset management.

Cameron Passmore: Awesome. Okay, let's go to our conversation with Mark Higgins.

Ben Felix: Mark Higgins, welcome to the Rational Reminder podcast.

Mark Higgins: Thank you for having me, Ben and Cameron. I'm excited to participate. I followed you quite a bit online, and it's great to be part of the show. Thank you.

Ben Felix: Super excited to be talking to you. To kick this off, Mark, how do you articulate the value of studying financial history?

Mark Higgins: When COVID hit in March 2020, like everybody, I thought everything that was happening was completely unprecedented. We were quarantined. So I started reading financial history books. The more I read, the more I realized there's almost nothing that happens in financial markets that is unprecedented. It just seems that way because nobody looks back far enough.

I realized that the panic of March 2020 was much like the June 1914 panic when World War I came out of nowhere. Post-COVID inflation was like post-Great Influenza inflation. I used it with clients mainly to calm them down and to give them a sense of what was happening and what could come. I honestly think it's the most overlooked and most valuable asset that you can have as an adviser, as a consultant, as just an individual investor, and it just continues to surprise me how overlooked it is.

Cameron Passmore: What role has the US financial system played in the success of the country?

Mark Higgins: It's been absolutely critical. And I actually do have a quote that I want to read from the book. It's from Alexander Hamilton. There are a couple people that stand out in history, and Alexander Hamilton was one of them. In 1795, he said so many things that are relevant today. And I'll go through more of them throughout this interview, I think. This is in 1795. To describe the role of credit, he said, "Credit, public and private, is of the greatest consequence to every country. Of this, it might be emphatically called the invigorating principle. No well-informed man can cast a retrospective eye over the progress of the United States from the infancy to the present period without being convinced that they owe in a great degree to the fostering influence of credit their present mature growth."

At the simplest level, having a financial system that can allocate resources to people that don't necessarily have the resources but have great ideas is a tremendous innovation. I mean, think about it. Before you had sophisticated financial systems, people who had wealth, it was up to them to innovate. But imagine a system where all of the great ideas that are out there with people who don't have resources, having access to that is absolutely critical. And that's what the US financial system has done.

Ben Felix: I'm curious what makes Alexander Hamilton stand out as a character.

Mark Higgins: He was just so ahead of his time in terms of foreseeing the challenges that the United States would have. The reason I started the book in 1790 is, if you rewind back to that, the United States was bankrupt. Some congressmen were fine with that. But Alexander Hamilton realized that in order to have a functioning nation and to protect the nation from periodic public dangers, mainly war, you needed to have sound credit to fund it. We almost lost the Revolutionary War. One of the reasons was we didn't have the same financial resources as the British did. He saw that as a fundamental requirement for a stable nation. I honestly don't think the United States would be probably around, certainly not in its current form, if not for Alexander Hamilton's vision.

Ben Felix: Wow. That suggests, I guess, that the creditworthiness of US government debt has been historically quite important. Is that accurate?

Mark Higgins: Absolutely. And it's unappreciated. Before this call, you sent a few questions, and one of them was, "What was the biggest surprise when I was doing this research?" And the biggest surprise was we did not always operate with chronic fiscal deficits. We've been doing it for so long that people think that that's the norm for the United States. It was not. That goes back to two principles that Alexander Hamilton established when he repaired the financial system of the country. And the first one was that you should primarily use the debt during times of emergency, mainly war, and then pay it back when the public danger subsides. And we did that with the War of 1812, the Civil War, World War I, World War II. And then we kind of started paying it back after World War II, and then stopped because we were basically emboldened by the tremendous post-World War II wealth that we had and the fact that we had the new dominant reserve currency.

What worries me now, and I've been talking a lot about this, is that debt levels are higher than they've ever been, even at the peak of World War II, right after the end of World War II. And most people don't appreciate the danger. And the danger, it's not necessarily, although it is to some degree, that we're just gradually going to exhaust our debt capacity. The danger is that we have eroded our debt capacity so much so that if there is an expensive, unexpected public danger, we may not be able to fund an adequate response. And it seems like almost nobody appreciates that probably because it's been so long since we've really had to deal with something like that.

Ben Felix: That's like a COVID version two or something like that, some major event.

Mark Higgins: We've always been able to fund it, but we're exhausting that supply. And the real anomaly is, COVID, I think we went too far with fiscal stimulus. But the global financial crisis, that actually is an appropriate usage of it. It's the fact that we weren't paying back during benign times and generating consistent surpluses to rebuild the debt capacity of the nation is a big concern.

Cameron Passmore: Can you expand on that? Based on history, how concerning are these debt levels?

Mark Higgins: It is hard to tell because there aren't that many precedents. The comparables to the United States, I guess, in recent times are, if you call it recent, the British Empire losing their dominant reserve currency status. It eroded in World War I, and then they lost it after World War II. And then before that, the Dutch guilder in the late 1700s when they lost the fourth Anglo-Dutch War. The consequences aren't necessarily that a nation completely implodes, but it does lose its global influence and power.

And I was giving a presentation, and a pretty senior person at the Federal Reserve Board was talking. They're calming things down that the United States is exceptional. We're such a large percentage of GDP. We're the innovation engine. And I'm just thinking to myself, "Well, my guess is the Dutch and the British said the same thing before they lost it." That shouldn't necessarily give us comfort. It doesn't happen often that a country like the United States loses its reserve currency status, but we're vulnerable by running up debt like this.

Ben Felix: Kind of related to that, how impactful has a central bank or the lack thereof been throughout US financial market history?

Mark Higgins: Most people don't realize that the Federal Reserve is the third central bank. Alexander Hamilton established the first central bank, that was part of the financial programs that he formed in 1790, and the bank got his charter in 1791. It was a 20-year charter. Congress didn't renew it, barely, by one vote. We went for a period of time, I think it was about 5 years in the mid-1810s, without a central bank. It was a disaster. Then we established a second bank. That was the famous bank war with Andrew Jackson. And then we went a long time, let's see, about 80 years without a central bank.

And the key thing that people don't realize is there are several functions of a central bank. One of them is stabilizing the currency. People are kind of unfamiliar with that. When you don't have a central bank and a bunch of other banks are just issuing notes denominated in dollars, they're not necessarily worth dollars. And when you have a central bank, a dollar is worth a dollar. That's one thing.

The other thing is central banks are critical as a lender of last resort. When you have a panic, it can accelerate very quickly. We think about banks; they have deposits, but most of their investments are in relatively illiquid loans. And if everybody wants their money back at the same time, they basically go under. A central bank serves as a fail-safe by buying those assets, providing them with cash during a crisis, and stemming a crisis.

So long story short, we haven't had a central bank for those periods of time, those 80 years between the Federal Reserve and the second bank, and those 5 years between the first bank and the second bank. Manias are more common. Panics are more common. Depressions are more severe and common. People don't appreciate, because we haven't seen a time like that for a very long time.

Cameron Passmore: Do you have some examples of what happens historically speaking when banking is unregulated?

Mark Higgins: Banks, they'll keep leveraging their balance sheets generally until they get in trouble. Not all of them, but there's definitely a tendency to do that. When you didn't have a central bank, for example, in the 1830s, you had a lot of – they're called state charter banks. They weren't very regulated. The way it would work back then is you would essentially have gold and silver as the reserves of the bank, and then they would issue notes, and you could redeem it for gold and silver. And they would just keep issuing notes at higher and higher ratios to the underlying gold and silver. Then, when there was some type of high demand to redeem the notes for gold and silver, and there wasn't enough, banks would go bust. And that was very permanent. And it was contagious, too. One bank goes bust, and everyone's like, "Well, maybe my bank's going to go bust." And it's a contagion." That's why you saw some very disruptive depressions when you didn't have a central bank to stop it.

Ben Felix: Is that the Wildcat Banking Era?

Mark Higgins: Yeah, that was the Wildcat Banking. And the worst period was in the late 1830s and 1840s. It's another thing with financial history that most people think the Great Depression was kind of the singular event in US financial history. I would argue there are two great depression level events in 1800. Some people would say three, but at a minimum, after the panic of 1819, devastating depression. After the panic of 1837, devastating depression. Some would argue that the late 1830s and 1840s were just as bad as the 1930s. At a minimum, they were comparable. Particularly the late 1830s and 1840s. One thing that's amazing is while technically the federal government has never defaulted, eight states and one territory, Florida was a territory at the time, did default after the panic of 1837. That's how bad it was.

Ben Felix: Wow. Are there common themes of causes and things like that for those big depressions?

Mark Higgins: It was real estate speculation in the 1830s. The wheels came off in terms of lending practices when Andrew Jackson essentially killed the second bank. In the 1810s, it was also real estate speculation. That was a little different because another interesting thing is natural disasters often relate to financial crisis more than people think. In 1815, Mount Tambora erupted and actually cooled the earth for a couple years. That caused crop failures in Europe more than in the United States. Wheat prices and cotton prices skyrocketed. A lot of farmers in the United States started aggressively buying land in the Midwest for farmland. When global temperatures recovered and there was a glut of wheat and cotton, prices collapsed. People leveraged themselves irresponsibly. That's what led to the panic of 1819 and the depression that followed.

Ben Felix: Yeah, it's fascinating. Definitely not common knowledge.

Mark Higgins: No, but it's similar dynamics. You see very similar things over and over.

Ben Felix: I loved your opening comment. And we were just kind of talking about it, too, about how we talk about things being unprecedented, but they rarely are. Can you talk about how common extreme market events, and I guess maybe it depends on how you define extreme, but extreme market events like big stock market crashes and big asset price bubbles. How common are those throughout history?

Mark Higgins: They're not that common, but they're more common than people think. They've been less common over the past hundred years, really since the depression, just because we've grown more knowledgeable on how to stop them before they become problematic. We have some of the worst panics. In the 1840s, you didn't have a central bank. So, you didn't have a lot of the fail states that we have today. But it's more common than people think.

One of the most dangerous things is when people don't think it's possible anymore. And the more distant you get from an event, the more likely it's going to happen again. That's what makes me very concerned about some of the things that are happening in private markets right now. I shudder to say this, but it concerns me more than crypto because nobody believes it's possible. It just seems universally accepted that private markets will help diversify your portfolio, will add to your returns, when a lot of evidence says that's not true. But even if it was true, that attracts so much capital that it becomes untrue. And it's very concerning.

Cameron Passmore: What are the early warning signs of a bubble?

Mark Higgins: Bubbles are so hard to predict. Anybody that says they see one, it's a pretty bold call because you never really know. One of the biggest warnings is massive amounts of capital moving into an area where nobody thinks it can happen. That seems to be happening in private capital right now, even more than crypto. There are a lot of crypto skeptics. There aren't that many private market skeptics that I've seen. There are some, but not a lot.

One of the reasons why these things are hard to see is because most people are occupying one segment of the supply chain, and they don't see how the whole supply chain works. You saw this during the global financial crisis with the way mortgages were originated, then passed on to investment banks, which packaged them into new products, which sold them into institutional investors. And everybody had an incentive to keep the supply chain going. Each chain probably thought what they're doing is probably not the best thing, but they didn't see the systemic problem with it.

And that's another thing that seems to be happening with private markets right now. You have a lot of capital that has gone in there over 25 years now with institutional investors. You have staff of pension funds that specialize in this. So, their career really depends on continuing it. You have consultants that the more complexity they add to a portfolio, the more they're needed, the more fees they can charge. Advisor, same thing. It just gets passed along the chain, and nobody realizes how dangerous the stuff is that comes out on the other end. I see that with private markets right now.

Cameron Passmore: How prominent looking through all of US history has that type of speculation been, where people are bidding up some asset class to ridiculous prices?

Mark Higgins: I wouldn't know how to put a number on it. But in your working life, expect to see a couple, maybe. The .com qualified, although that was much more compartmentalized. The global financial crisis was especially dangerous just because people compared it to the 1930s. It actually reminded me more of the panic of 1907, where you had this huge shadow banking system that was outside the visibility and protection of the Fed. It collapsed. And that was especially dangerous.

It's very similar to what happened with the truss in the panic of 1907. We barely dodged a depression there if it weren't for J.P. Morgan really organizing a private rescue. That's what led to the return of a central bank was we barely dodged a bullet there. That created enough pressure in Congress to bring back a central bank. It's hard to tell frequency. I'm getting uncomfortable with how distant the speculation in the early 2000s is from today. People haven't seen a major crash in a while. I don't try to time these things, but there's in the back of my mind kind of a bad feeling right now.

Cameron Passmore: What historical parallels are there for crypto or even meme stocks?

Mark Higgins: Crypto is a weird one where the periodic table is pretty constrained. I don't know the software behind it, but to the extent that they really have created something that can't be hacked, that is a scarce resource; it is unique. Do you really need another gold? I don't know. I joke with everybody that if I ever buy any cryptocurrency, sell everything you have because there's nobody left behind me, I would never buy it. I don't see the long-term need for it. Could I be wrong? Sure. But I just get the feeling that it's more based on speculation than need. An asset like that, I would never buy. But it is unique in the sense that if it is legitimately a digital form of gold, when's the last time someone discovered something on the periodic table that could be used as a replacement for gold? That's not really possible. My gut is it's more speculation than value.

So the meme stock thing, that's not unique at all. That's basically a loophole in doing a stock pool. Before the Securities Exchange Act of 1934, which outlawed market manipulation, the way you made a lot of money on Wall Street was manipulating the market. Basically, you'd have a stock pool that would put false stories in the press, pull up the stock, and then the stock pool would get out. And the Gilded Age is even worse. There's some pretty funny stories back then.

A meme stock is basically – to me, it's collusion in that, whatever that guy's name was, Roaring Kitty or whatever, he knew that when he announced he was taking a position, everyone was going to blow up the stock. To me, that is a loophole on market manipulation. Was it illegal? Technically. Probably not. But was it in spirit a stock pool? I would argue yes. That was not unique at all.

Ben Felix: Yeah, it's really interesting. Their little tagline, "We like the stock. We like the stock. We're not manipulating the market."

Mark Higgins: I got to believe, I assume, that he knew exactly what he was doing. That he knew if he posted that, the market would go up. And to me, it doesn't strike me as very different from market manipulation.

Ben Felix: That is a very interesting parallel, and it lines up very closely. Can you talk about the historical origins of the many flawed practices that are still so common in the investment industry today?

Mark Higgins: Maybe we'd probably have to go back millions of years. I'm not an evolutionary biologist. But which ones specifically are you talking about, I guess?

Ben Felix: Market timing, the prevalence of active management, overtrading, all that kind of stuff.

Mark Higgins: When you study a couple of hundred years, you start seeing big currents don't change that often. So, you miss them if you're just living in the moment. So if you go back to the Gilded Age, even the early 1900s, before the Securities Exchange Act, the way you really made money on Wall Street is market manipulation, insider trading, and if you can get away with it, securities fraud. That changed with the Securities Act of 1933 and the Securities Exchange Act of 1934. You could still manipulate the market, but you were taking legal risks. That marked the beginning of the securities analyst.

It's not a coincidence that Ben Graham published Security Analysis, and it was so popular in 1934 because you needed a new way to make money on Wall Street. That was really the birth of active management. What is interesting is it didn't take long before it was clear. It's probably clear to the market manipulators before the Securities Exchange Act that it was really hard. Because there's so many smart people all looking at the same public information, it's very hard to figure out something that is different and right in a way that is better than everybody else.

There's a mathematical principle on this. Francis Galton discovered it in 1907. There was this contest at a farm in Great Britain where a bunch of people were guessing the weight of an ox. He found that the average guess was actually pretty darn close to the actual weight and was much better than I think it was like 90% of the individual guesses. It's the same thing with stock market. So many people looking at securities, it's very hard to figure out a good value for that security that's better than the average. But most people don't accept that. There's a study produced in 1940 by the SEC that showed it. And those observations are repeated every year. Studies by S&P Global, Morningstar. There's a whole industry built around it, and they don't want to accept that. That's one flaw that persists.

Ben Felix: I think Ben Graham even in – I don't know if it was a later edition of his book. I know it was the first one. At some point, he did write that buying a cross-section of all stocks might actually be a pretty good strategy.

Mark Higgins: Oh yeah, he did. There's a quote on my wall from Ben Graham where he basically said you can outperform the market as a group to financial analysts because effectively you are the market. He realized the game was kind of up.

Cameron Passmore: What do you think are the most important lessons from US financial history for people who are making financial decisions today?

Mark Higgins: What I tell people is almost nobody can outwit the market, both in terms of timing or security selection. The best approach is to have an allocation that makes sense for your time horizon. I'm assuming here that it's a long time horizon. But if it's a short time horizon, you know you can't take as much risk. Use low-cost index funds for implementation unless you are a very rare breed, and almost everybody isn't. Rebalance as market returns cause that allocation to deviate and don't react to things that are fleeting.

I basically read my way to the present. I started in 1790. I would read, read, read, read, read, read, read until I felt like I understood what happened at a high level during that period. And I just kept reading to the present. And I would read newspapers around major events. I'd spend a weekend and read newspapers for a couple of years, selecting one newspaper a week or something like that. And you just start realizing that most of the stuff is noise.

The big changes don't happen often. Almost everything you read in the newspaper is noise. It's going to disappear and be forgotten very soon. And you just don't react to it. Most people are much too reactive to what amounts to noise. We think things are unique when they're not.

Ben Felix: That's such an important insight. I love that. What lessons from history, I'm asking you to speculate here, do you think that the US financial system is going to have to relearn or is going to end up relearning the hard way?

Mark Higgins: The question is where. We relearn the same lessons constantly. What's happening in private markets is not unique. Unless there's something I'm missing, it's going to collapse in sort of a unique way, but not as unique as people think. A lot of people are going to get burned. Another thing that'll probably happen is some regulations will get created that are intended to solve the problem. And to some extent, they might, but then they're going to cause a new problem. That happens a lot. We constantly relearn lessons. And it's such a tragedy because it's not necessary, but that just seems to be the way we operate. That's the pessimistic.

We also have learned a lot, and that's something that often gets taken for granted. We're not doing complete wildcat banking. And we're not missing a central bank. State banks issuing currency that depreciate as you get further from the bank is not happening anymore. So, we have learned a lot, but it's kind of like two steps forward, one step back.

Ben Felix: We kind of are redoing all that stuff with the whole crypto ecosystem. That's like its own version of wildcat banking.

Mark Higgins: That's worrisome. I would not invest in that.

Ben Felix: Regulations have gotten better. So, people were like, "Well, let's just create a new thing that's not regulated."

Mark Higgins: Well, especially the decentralized banking. That has been tried before. If you look at the state charter banks in the 1800s that were effectively issuing their own currency, I do see similarities between decentralized banking now and the wildcat or free banking era in the early 1800s. I don't see how that's stable. We already saw some of them blow up, and I expect to see more.

Ben Felix: Got to keep relearning lessons the hard way, I guess. I want to talk more about alternative asset classes. The big alts that we're seeing today, how long have those asset classes been around?

Mark Higgins: Longer than 45 years. But the trend really started 45 years ago in the 1970s. The age of computing was really getting going. And the venture capital firms that were funding them were having trouble raising capital. And one of the reasons was the trustees at pension funds and insurance companies, they were worried about the Department of Labour's interpretation of the prudent man rule which essentially prevented them from investing anything that had a high likelihood of major loss.

The National Venture Capital Association had a big lobbying effort to change that interpretation, and it was successful in 1979. And then you saw a flood of capital going to venture capital and also buyout funds, which there was a unique opportunity for a variety of reasons, which I write about in the book, to do buyouts. And they had the win at the back. It really took off in the 1980s.

David Swensen joined the Yale University endowment in 1985. They were early investors in both buyouts and venture capital. They did extremely well. Then in 2000, he wrote Pioneering Portfolio Management, which shared his strategy. It didn't say this, but people interpreted it as, "Well, if we just allocate to alternatives, we're going to get Yale-like returns." So then that really accelerated the flood into things like private equity, or called buyout funds, venture capital, now private credit, hedge funds. It has just increased a massive amount over the past 25 years. Now the latest trend is bringing it to retail investors even in 401(k)s, and it's really concerning.

Cameron Passmore: Why has so much been allocated to alternatives in recent history?

Mark Higgins: I think the trigger was the people chasing Yale-like returns. But now you have a situation where you have consulting firms that can increase their fees, kind of entrench themselves with organizations by making portfolios more complex. Now, do they do this consciously? Some probably do, but a lot of it's just subconscious.

You have staff at major pension funds, and endowments, and foundations whose entire career is built on running an alternatives portfolio. This is the danger of it. You have this perception that just allocating to alternatives is going to get you better returns and better diversification. And there's a lot of evidence, by the way, that that's not true. But even if it was true, the more funds you shove into the sector, the less likely it's going to be true in the future. The incentives are not aligned with stopping this.

It's made me more skeptical of academia. You see these very complex studies that will say how alternatives have increased risk-adjusted returns. They use different time periods, and they get into minutiae and miss the big picture. And the big picture is when you have a massive amount of capital moving to a certain sector, I don't even care what the past returns look like at some point. The future returns are not going to look the same. You have all these studies evaluating minutiae in the past that is no longer applicable. I think that's a danger too.

Ben Felix: Totally. It's a simple equilibrium effect. If an asset class is that good, then people are going to invest in it up until the point until it's not that good anymore, other than the risk that you're taking.

Mark Higgins: And all of the academic studies, my interpretation of them is that I don't think they're giving the right message to begin with. But even if they were, it's not applicable anymore.

Ben Felix: Super interesting perspective. I tend to agree with you. Related to this, this drives me crazy because I've experienced it firsthand. Can you talk about how modern portfolio theory is abused in the promotion of alternative investments?

Mark Higgins: I gave a talk at CFA Live in March or April. It was basically arguing at private credit. It's just the next one. It's flooded with too much capital, and most people are going to be disappointed. I went over a bunch of red flags, and one of them was there is standing room only in the room, which in and of itself is a red flag that everyone's looking at the same thing.

But more importantly, I looked at this company called Horizon Actual Aerial Services does like an average of long-term assumptions for different asset classes they survey. I don't know what it is. 20 to 40, or something like that, consulting firms and advisory firms. What's interesting is the amount of money going into private credit is accelerating. Yet the long-term expectations are also going up. While over the past 5 years, the assumptions for the long-term return, like a 20-year return for private credit, have consistently gone up when the amount of capital is skyrocketing, which you should see the opposite effect.

As the amount of capital goes in, you should see future expectations going down.

So, the two largest allocators to private credit, I don't know if it still is, but at the time of the speech, it was for the prior six months, were a company called Makita and RVK, where I used to work. Their assumptions consistently went up, especially Makita, over the past 5 years. Is it that they're doing something unique, or is it that they're driving all these allocations simply because they've made a return assumption that is higher than everybody else? That's the way it's abused.

These models are very imprecise. They're useful to visualize the risk-return trade-off, mainly between equity and fixed income. But beyond that, they're not precise. And the danger is that you can literally drive massive amounts of capital just by raising an input well within the margin of error and drive capital into areas that you shouldn't. In general, it is used well beyond its intended purpose.

Ben Felix: I would also throw in the expected return piece for sure, but then you've also got modeling low correlations with public assets, which just further exacerbates all these issues.

Mark Higgins: It's little more than guesswork marketed as science.

Cameron Passmore: What do you think about the "evergreen funds" that many private equity managers are launching?

Mark Higgins: I always marvel at how – when there's a loophole, it's like watching a helicopter shove a huge load of $100 bills over Wall Street and just watching what happens. That is what is happening with these evergreen funds. In 2009, there's this kind of obscure valuation guideline called ASA *20 issued by FASB. And at the time, secondary transactions were very uncommon.

If you were an LP in a private equity or venture capital fund, you usually held it until the life was over. Selling those on the secondary market was very rare. There were about 10 billion secondary transactions in 2009. They were traded among different pension plans and foundations, and endowments. It's called a practical expedient for reporting purposes. It was kind of hard. If you bought one of these, and you bought it 20% below the latest reported NAV. And the NAV keeps coming in different than how you bought it. It was kind of a pain for reporting purposes.

The FASB allowed you, it's called a practical expedient. If you bought an LP interest for 20% below or any percent below, you could immediately mark it back up to NAV just to make reporting simple. But the problem with that is you had a one-day gain. But these things were kind of rare, and it didn't really move the needle that much.

Fast forward 15 years, the number of secondary transactions has risen from 10 to about 160 billion last year, and it's expected to go up to 200 billion. But even more concerning is now, which was not true back then, you have these closed-end funds that are called evergreen funds that are offering retail investors access to private markets. One of the ways they're making them attractive is they're starting the fund by buying LP interest on the secondary market, immediately marking them up to the NAV, sometimes by 20%, 30%, 40%, reporting enormous returns, but they're based on markups that assume that the NAV is correct.

The analogy I use is if you saw on Zillow that a house was worth 1.3 million, you bought it for a million, probably because it's worth a million, and then immediately mark it up to 1.3 million and brag to all your friends that you just made 30%. That's essentially what's happening. What makes it a fundamental structural flaw is that the only way to continue generating these returns is to keep buying incrementally larger amounts of secondaries. That kind of formula, eventually, you run into problems when the money runs out. And the money will run out because you have to keep buying incrementally larger amounts of money. The question is when. I don't know. But if there's a way for this to end well, I don't see it. I just don't see it.

Ben Felix: I just want to walk through it to make sure it's clear for listeners. And then you tell me if this is right. A private equity fund invests in some company. And usually private equity funds sell companies within kind of 3 to 5 years. Now they've created these evergreen funds that are buying on the secondary market. So, a company that's already been purchased by another private equity fund. The evergreen fund is buying it from that private equity fund, and they're buying it below the NAV, which in a transaction you'd usually assume that is the price, but they're assuming that actually isn't the price. The NAV is the right price. And they're taking that difference between what they paid for it and the NAV they're marking it up to as an immediate return to the fund. And this is all kosher from the perspective of FASB, which is the accounting standards body in the US for GAP accounting.

Mark Higgins: Correct.

Ben Felix: Yeah. That's wild.

Mark Higgins: The big bet is that the NAV, which there's a lot of evidence that these are inflated. Just look at the long queue. Private equity fund exits are really strained right now, at least at the prices that they're marketing these assets to with the NAV. There's a lot of evidence that not only is the discount probably the real value, it might be inflated now because you have so many secondary funds that are bidding on these assets to generate those initial markups to attract more investors. There's actually an argument that the discount is above what they should be paying. This is just a loophole that's being exploited to the point of, at this point, absurdity.

Ben Felix: Obviously, this is going to boost the returns of the evergreen fund that's buying the secondaries. How big is this effect? If you go and look at these funds, what kind of returns are they showing from these?

Mark Higgins: Oh, it's a huge effect, especially initially. It gets less, which is the challenge. As they get bigger, you have to get bigger and bigger chunks to make a difference. You already took the markup on the stuff that exists. I'd have to go into actual data, but there are some funds where almost all of the return within the first couple of years is from the secondary interest. When they buy an LP, they invest directly in a fund. Takes a long time to get a return if you get a good one at all. So, all of the returns in the first couple of years are coming from secondaries.

To make matters worse, and this is where it gets really ugly, a lot of these funds are paying themselves incentive fees on the performance based largely on the one-day gains. There's one case that was profiled by Tim McGlinn and Jason Zweig at the Wall Street Journal, the Hamilton Lane Private Assets Fund. And I don't know how in the world they convinced their investors to approve this. But somehow, they did.

They changed the way incentive fees were paid. They used to do it based on when the assets were sold, which makes sense if you just mark it up based on the NAV. I mean, you don't know if that's real or not. It made sense if you realize those gains, then you pay the incentive fees. But they changed the rule so you could pay the incentive fees out just based on the markup. Think about that. Imagine if you got your friends to invest with you. You spend a million dollars on a house that Zillow said was worth 1.3 million last week. You can mark it up to 1.3 million and then pay yourself an incentive fee for getting a monster return. That's what's happening.

Ben Felix: Yeah, that's crazy.

Cameron Passmore: So, what do you see as the biggest red flags in private markets today?

Mark Higgins: The biggest one is no one believes a bubble is possible. To be clear, I don't know if it's a bubble. To me, it's pretty obvious. The risk-return is just so skewed. In crypto, at least, there's a lot of skeptics out there. There aren't many skeptics in private markets. That alone is scary. You have the supply chain. You have the media. It's very difficult to convince the media that this is a problem, especially the trade media. When you think about it, the trade media is funded by a lot of these organizations, with advertising. So, there's very little skepticism. When you have very little skepticism with a massive capital inflow, that is very scary. And then just the stuff with the evergreen funds.

The funny thing is, it's almost like they have a bank run problem, but they've solved that by pushing all the risk on the investors. So, a lot of these funds can gate immediately. They don't have to honor redemptions at all. Even their guidance is – if there's more than a 5% outflow, we can lock the fund, and you can't get your money out. There's going to be a run on some of these funds eventually, even if it's not their fault.

There were bank runs back in the 1800s because there's a big line at the grocery store next door. It may not even be their fault. And when that happens, they're just going to gate it, and you're stuck there. So, it's like they solve the problem of the bank run by putting the risk on the depositors.

Ben Felix: It probably goes without asking based on everything you just said, but what do you think the outcome is going to be if retail investors, which they've been getting easier and easier access to it, and that's true both in the US and in Canada. What do you think the outcome is if retail starts really taking up private assets?

Mark Higgins: I think people are going to be very disappointed with the returns, and they're going to be stuck in these things longer than they can imagine. I wouldn't touch these things with a 10-foot pole. And the fees on them. And I wrote about this actually in the book before I was aware of these things, because I ended the book in March 2023. And this was early days of the evergreen funds. And I remember reading about the fees that they charged for investment companies in the 1920s and 1930s, and I was just like, "This is ridiculous."

They would have a commission load essentially of 7%. The annual fees would be 1%, 1.5%. There are also some other fees. It amounted to like 5% a year for a lot of these funds. And I was thinking to myself, "Wow, I can't believe that happened. We'll never see those days again." Well, we have.

You look at some of these evergreen funds, and with their management fee, with their incentive fee, there's an added cost to have it custodied. Then you have the underlying fees of 2 and 20. I mean, you're talking 5% or 6%. I don't know how you could possibly argue that they're going to generate enough value over 5% or 6% a year to warrant investment. It’s mindboggling.

Ben Felix: It's another case, I would say, of financial innovation benefiting the people creating the financial products more so than the people investing in them.

Mark Higgins: That's usually the way it works.

Ben Felix: Yeah. You work at IFA with Mark Hebner, who's been on this podcast in the past. In your capacity there, you work with institutional clients.

Mark Higgins: Yes. Also, a lot of high-net-worth too.

Ben Felix: Okay. You work with high-net-worth too. Okay. Good to know. How often are you seeing institutions who have been sold alternatives?

Mark Higgins: That's typical. That's the thing that always amazes me is there's so little skepticism about it. The simple answer is they're just surrounded by consultants, by advisors, by staff, by the trade media, all saying the same thing. It's hard to dissuade them of that.

And the funny thing about it is trustees of institutions, they're very resistant to doing something very different than the norm and the standard. If you go out on a limb and you get it wrong, there's a lot of reputational risk. The irony of that is if you're going to be like everybody else, then the only sensible way to go is to index everything. If you're going to outperform your peers, you have to be different. You most likely have to be early, and you have to be right.

If you're doing what everybody else is doing by allocating heavily to alternatives in the same places, by definition, you're not early, definitely not different, and you're almost certainly wrong. It's a completely self-defeating strategy. It's not that hard to see if you open yourself up to that possibility. If you're going to be like everybody else, the only sensible thing to do is to index. It's hard to convince people.

Cameron Passmore: How's the uptake of index investing been in the institutional world?

Mark Higgins: To be honest with you, it's easier with high net worth. And that's why I do have a sizable high-net-worth component now. My background isn't institutional. I think it's desperately needed. It's just a harder sell, and it takes longer, too. High net worth can move relatively quickly.

Cameron Passmore: Harder cell, really?

Mark Higgins: With institutions? Yeah.

Cameron Passmore: Yeah. Really?

Mark Higgins: It's a very different mentality. On the smaller end, it's less hard. I highly doubt there'll be any uptake anytime soon with large public pensions that have billions of dollars. That is a really hard sell. On the smaller end, it's not as hard. But high-net-worth is easier to explain the rationale behind it.

Ben Felix: The peer effects in large institutions is just so strong because they look at their investment committee down the road, who also have alternatives, and like, "Well, we can't get rid of alternatives if these guys still have them."

Mark Higgins: It's not a sound strategy, but it's hard to convince people.

Ben Felix: Let me tell you the premise first. You can tell me if you agree. I think the uptake of alternatives in general has been much stronger and happened much earlier with institutions, even smaller ones, than it has with retail. Do you agree with that observation?

Mark Higgins: I don't know. I don't have as much experience on the retail side, probably because they didn't have the vehicles available. But now they have the evergreen funds, which if I had to pick the worst possible vehicle to sell to a retail investor, that would be it. But probably that. I don't have as much familiarity with the history behind it, though.

Ben Felix: On the topic of it being difficult to convince institutions. If you're sitting down with an investment committee, telling them like, "Hey, index funds make a lot of sense. This alternative stuff is no good." What's the main push back? What are the main challenges in talking to that type of group?

Mark Higgins: This is where there's a disadvantage. There's usually not that much pushback. But I know that there are plenty of academic studies that I would question, and consultants or other advisers using their expectations to say, "Even if that is true. Generally, we've solved that problem," and they probably convinced them. You don't necessarily see the process going on. And to be clear, I have almost 100 million or around 100 million in institutional assets. It's not impossible. It's just I have a lot more high-net-worth in terms of assets under management.

Ben Felix: One of the most educational things that I've done the last few years is joined an investment committee as a volunteer and just seeing how that sausage is made and how decisions are made, and it's absolutely fascinating. A lot of it really is peer effects, like this is what everybody else is doing, existing biases, advise from consultants. And it's diverse opinions too. You can't just convince one person, "Well, this is what we should do." Even if you do convince one, there might be other people who don't agree. And you mentioned these decisions with institutions taking a very long time. It's a very slow-moving process.

Mark Higgins: The greatest risk that investment committees have is the instability of their own governance. They're going to get replaced, let's say, on average, every 5 years. Every time there's turnover, there's risk that they're going to reverse things at an inopportune time. I mean, there's a lot of evidence that they do do this. By indexing, you're basically hedging governance instability. Because if you're constantly hiring active managers and firing active managers and there's turnover, there's a good chance that the new group's going to come in and be like, "This manager is underperforming. This manager is underperforming." You're going to fire them at the wrong time. Then you're going to hire a manager that is outperforming and then repeat the cycle every 5 years. That's actually something that's at more of a risk with institutions than it is with individuals. And people don't often see it because they only look at their tenure. They don't see what's coming next.

Ben Felix: That's a super important point. Indexing does kind of solve that. But also, every time you get turnover, I've seen it where the new investment committee comes in and they don't want to do indexing anymore. I think the ones I've seen that are super successful over long periods of time have a person or a small group of people who are like major advocates and continuously convince everybody this is the right thing to be doing. But without that, it's tough.

Mark Higgins: One thing that does help, if you look at Nevada PERS, they've been almost entirely indexed for 20 years now. The wind is at your back, especially over long periods of time. Short periods of time, there's randomness involved here. But over long periods of time. Now, Steve Edmundson, he's outperforming. It depends on the time frame, but like 90%, 95% of his peers, that's before fees. And he has a huge fee advantage. It's hard to argue to abandon indexing when you have performance like that.

Ben Felix: Yeah, true. His story is so cool.

Cameron Passmore: So, 60/40 isn't dead.

Mark Higgins: Yes, but that's assuming everyone has a risk profile. You can have the 70/30 and 80/20, 50/50. You don't have to necessarily have a 60/40. It depends on your risk profile. Minimizing the cost through indexing and the risk of underperforming the market using active management is the more important point.

Cameron Passmore: Our final question for you, Mark. How do you define success in your life?

Mark Higgins: Well, on a professional level, I always look to Alexander Hamilton. He had a great quote that came from August of 1782. It was a bad period of the Revolutionary War. And he was dispatched to New York to report on economic conditions. And he told the Continental Congress exactly how bad things were. And he ended the letter, and you can see it online, with a statement that, "I always thought my duty to exhibit things as they are, not as they ought to be." I believe that there is a market for truth. Not that I know it perfectly, but if I strive to tell it to the best of my ability, I think I'm doing something good that I could feel good about. That's what guides me on a professional level.

On a personal level, I have my personal values with my family. Just staying true to those. Your circumstances change, which there's a risk that that can change your values. And always trying to stay as grounded as possible and not to change those values is something I strive for personally. Those two things.

Ben Felix: It's a great answer and makes you a great fit for this podcast.

Mark Higgins: Well, thanks.

Ben Felix: I thought that was a great conversation, Mark. Thanks a lot. Thank you both for having me. I appreciate it. I hope this is helpful to people.

Cameron Passmore: Great to see you. Thanks for coming on.

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