C'mon in, everybody! The water's fine!
That's Wall Street's message about liquidity, or your ability to buy and sell, if you invest in alternatives to publicly traded stocks and bonds, such as private equity, venture capital, nontraded debt and commercial real estate.
The water isn't fine.
Mixing private with public assets, as giant asset managers are racing to do, is confusing, cumbersome and risky. This so-called democratization of alternative assets has rapidly become one of the biggest marketing pushes in the history of investing. Before you jump in, look at what's been happening.
A commercial real-estate fund that was offering limited quarterly liquidity at its stated value per share is trading publicly now—most recently, at 28% less than its net asset value. Private-credit funds have been slashing their income payouts and dumping assets to cash out investors.
Another cautionary tale in this saga of democratization is the ERShares Public-Private Crossover exchange-traded fund. This ETF announced in December 2024 that it had "made history" by making Elon Musk's private company SpaceX its top holding. At year-end 2024, SpaceX constituted 9.9% of its net assets.
ERShares initially paid the equivalent of $135 a share for its exposure to SpaceX, in the form of a special-purpose vehicle, a nontraded entity that can hold an interest in Musk's venture. SpaceX's acquisition last month of xAI, Musk's artificial-intelligence firm, values the combined company at $526.59 per share.
So the ETF has generated a huge return, right?
Wrong.
Since Dec. 3, 2024, when it announced its SpaceX position, the ERShares ETF has cumulatively lost 4.8%. Over the same period, the Invesco QQQ ETF, which contains some of the same technology stocks as ERShares, is up 18.6%.
A fund with a sizable position in one of the world's most coveted private companies has lost money—even though SpaceX's value has almost quadrupled over its holding period. ERShares says that's partly because, relative to the overall market, the fund had less exposure to the biggest tech stocks.
Combining a private asset with public holdings hasn't helped performance, either.
The ERShares ETF entered December 2025 with about $380 million in assets, according to Morningstar; almost 9% was in SpaceX.
Then a tidal wave of money poured in.
Investors presumably were looking to get a piece of SpaceX before its hotly anticipated initial public offering, which may launch later this year. From Dec. 16 through Dec. 22, nearly $880 million gushed into the ERShares ETF, according to FactSet. Assets shot past $1.6 billion, more than doubling in five trading days.
Because the fund couldn't immediately add to its SpaceX, its burgeoning total assets shrank the weight of that holding to only 2%.
"As the fund's assets expanded, the percentage weight of the private holdings declined, which reduced their impact on overall returns."
— Joel Shulman, Chief Investment Officer, ERShares
ERShares says it was later able to add to its SpaceX position by converting its special-purpose vehicle to a "simplified structure." The fund finished 2025 with nearly 13% in SpaceX, according to a regulatory filing.
Just as the fund's weighting in SpaceX shrank when money came into the ETF in December, it mushroomed when money went out.
People can sell an ETF whenever they want. The fund is liquid, even though its SpaceX stake isn't.
On Feb. 26, large holders—"not long-term investors," says Shulman—yanked more than $625 million. In a single day, the ERShares ETF's assets were chopped by more than half, to less than $500 million.
The SpaceX position's dollar value didn't change. But, as the fund suddenly shrank around it, SpaceX swelled to 44.5% of the ETF's assets. It peaked—for now, anyway—at 45.7% on Feb. 27.
Then money came sloshing right back into the fund, shrinking SpaceX's share of the portfolio to 28.3%.
One of the basic principles of long-term investing is asset allocation: putting a predetermined amount of money into a particular holding. The ERShares experience wreaks havoc with that idea.
On any given day, nearly half your total investment in the ETF could be in SpaceX, or far less. It depends largely on the whims of traders who whip money in and out of the fund.
That's not the only problem with shoving private assets into a public fund.
Because federal regulations generally restrict illiquid securities to 15% of a fund's assets, the ERShares ETF can't buy more SpaceX. As of this week, it already held more than twice as much as the rules allow.
If SpaceX went public tomorrow and its stock immediately doubled, the ETF could be compelled to sell a large block of its SpaceX—at the very time when investors would be most eager to own it.
"That would mean our shareholders made a very nice profit. If we need to offload some, we can easily do that. I don't know a single shareholder or a single manager that would cry."
— Joel Shulman
Really? Wouldn't they prefer to own as much as possible for as long as possible?
Even trying to understand the risks and costs of a mongrelized private-public fund can give you a headache.
On March 3, the author asked Shulman why a recent press release had cited risks—including "Concentration Risk" and "Exit Strategy Risk"—that weren't detailed in the ETF's prospectus. The next day, ERShares filed a prospectus amendment including a long recitation of such disclosures.
Several questions about fees and expenses were also raised. The revised prospectus promptly added a table indicating that investors would incur 1.06% in annual "acquired fund fees and expenses"—more than doubling the reported annual costs to 1.81%.
Shulman says investors wouldn't actually pay that, but the revised prospectus only says the fees are "current" and are "paid by the fund."
Don't jump into any pool unless you can figure out how deep it is.