Alternatives & Private Markets

This marketWhat it is, what trades, and the ideas it runs on.

The market at a glance

Alternatives are everything that doesn't trade on a public screen: private equity, private credit, venture capital, hedge funds, real assets and insurance-linked securities — together one of the largest pools of institutional money, and the fastest-growing. Pension funds, endowments and sovereign funds now routinely allocate 20–40% here, chasing returns public markets no longer promise and paying handsomely for the privilege.

The defining features: illiquidity (capital locked for years, sold only at a discount in secondaries), access barriers (minimums, accreditation, relationships), fee structures ("2 and 20" and its descendants), and valuation by appraisal rather than by market — which smooths reported returns and flatters risk statistics, a phenomenon politely called "volatility laundering".

The numbers game: IRR, MOIC and their tricks

Private markets report performance in IRR (internal rate of return, sensitive to timing games like subscription-line financing) and MOIC (multiple on invested capital — cash out over cash in, immune to timing but blind to time). Neither alone tells the truth; together with a public-market equivalent (PME) comparison, they start to. The calculator below does the honest arithmetic.

Interactive: MOIC ⇄ IRR converterEasy

Turn a fund's cash-in / cash-out into its multiple and implied annual return — then compare with what public markets would have done.

Capital invested $M Capital returned $M Holding period (years)

MOIC

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Implied IRR

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Same $ at 8% public

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Single-cash-flow approximation; real funds have staggered calls and distributions (J-curve). If the fund's outcome doesn't clearly beat the public alternative after fees, the illiquidity wasn't paid for.

How the products fit together

Private equity buys whole companies with leverage and sells them improved (or at least re-levered). Venture capital funds portfolios of long-shot equity where one winner must pay for the graveyard. Private credit replaced banks as lender to the buyout world — floating-rate, covenant-negotiated, illiquid. Hedge funds are the liquid-markets branch: strategies, not assets. Catastrophe bonds import insurance risk into portfolios — the rare return stream genuinely uncorrelated with everything else here.

Concepts to master

• The J-curve — fees and markdowns come first, distributions later; commitments must be paced across vintages, not timed.
• Fees compound against you — 2/20 with catch-ups and deal fees can consume a third of gross returns; net-of-fee, after-PME is the only honest scoreboard.
• Smoothed marks ≠ low risk — appraisal lag hides beta; leverage sits inside portfolio companies where volatility statistics can't see it.
• Dispersion is the asset class — top-quartile and bottom-quartile funds differ by thousands of basis points; manager selection isn't alpha here, it's the entire proposition.

Interactive: fee drag over timeMedium

"2 and 20" sounds like a detail. Compound it for a decade and it's the difference between the investor's yacht and the manager's.

Gross return % p.a. Management fee % Performance fee % Years

Net return p.a.

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100 grows to (gross)

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100 grows to (net)

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Share of gains paid in fees

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Performance fee charged on returns above the management fee, no hurdle, no high-water-mark subtleties. Real fund terms vary — the compounding lesson doesn't.

Interactive: Sharpe & Sortino ratioEasy

Return alone says nothing. These two ratios ask the only question that matters: how much risk was taken to get it?

Return % p.a. Risk-free rate % Volatility % Downside deviation %

Excess return

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Sharpe ratio

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Sortino ratio

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Reading

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Sortino divides by downside deviation only, rewarding strategies whose volatility is mostly upside. Both are gameable by strategies that sell rare disasters — a steady 2.0 Sharpe from selling options says nothing about the year the disaster arrives.

The same questions, asked of all elevenThese sections answer the same thing on every asset class, so the answers can be read next to each other.

The units this market speaks in

• There is no price, so there is no return in the usual sense. Performance is an internal rate of return — money-weighted, and therefore sensitive to when the manager chose to call and return capital rather than only to what the assets did.
• Multiples say what a percentage cannot. MOIC is what came back per unit invested; DPI is what was actually distributed; RVPI is what is still on paper; TVPI adds the two. A strong IRR with a low DPI means very little has come back.
• Committed capital is not invested capital. The gap — uncalled commitment — is an obligation, and the cash to meet it has to sit somewhere earning less. Private equity fund.
• The J-curve is a shape, not a result: fees and early write-downs come before any exits, so the first years look bad by construction.
• Fees are stated as a management fee and a performance share, with a hurdle rate and often a catch-up. The catch-up is where the arithmetic stops matching most people's mental model. Who gets paid.
• The valuation is an estimate produced by the person being measured on it, reviewed by a valuation agent. That is a structural fact about the unit, not an accusation.

Who is choosing, and who is forced

The illiquidity that defines this asset class also defines who can act. A private fund cannot be sold on a bad afternoon, so the forcing shows up somewhere else — in the commitment schedule, and in the denominator.

• Forced: investors meeting capital calls. A commitment is an obligation. When calls arrive faster than distributions, the cash has to come from selling whatever can be sold, which is the listed portfolio.
• Forced by arithmetic: the denominator effect. When listed markets fall and private valuations do not, the private allocation rises above its target without anybody buying anything — and a rebalancing rule then requires action.
• Half-forced: secondaries sellers. Selling a fund stake early is possible, at a discount that reflects exactly how much the seller needed to.
• Choosing, and this is the point: the general partner. Entry and exit timing is theirs, which is both the source of the return and the reason the reported figure is money-weighted. What the wrapper changes.
• Choosing until they are not: open-ended vehicles over illiquid assets, where the gate is the mechanism that converts a choice into a queue. Can a fund stop me leaving.

What a bad day looks like here

• The shape of it: nothing happens. That is the problem. The marks do not move, the listed portfolio does, and the allocation drifts without a single transaction.
• The first tell: the secondary market. Fund stakes changing hands at a discount to the last reported value is the only price signal this asset class produces, and it arrives long before the marks move.
• The second tell: distributions slowing. Exits are the manager's decision, so a quiet distribution quarter says more about the exit environment than any valuation does.
• The third tell: payment-in-kind and amend-and-extend activity in private credit — interest being deferred rather than paid is a stress indicator that does not appear in a default rate.
• The mechanism to name: liquidity mismatch, wherever a daily-dealing wrapper sits over assets that take months to sell. How products fail.

How a trade actually happens here

There is no trade here in the sense the rest of the site means it. What exists is a promise to fund, a queue to get out again, and a value struck by an administrator rather than agreed between two parties.

• Committing, not buying. An investor signs a subscription agreement promising an amount, and the money stays where it is until it is called. The commitment is the obligation; the investment happens later and in pieces. Private equity.
• A capital call is a letter with a deadline. Ten business days is a common notice period, and failing to fund is not a missed opportunity — partnership agreements provide for defaulting investors, and the remedies are severe on purpose.
• Distributions come back as things are sold, in an order the agreement sets out: capital returned, then a preferred return, then the split. That order is why two funds with the same gross return can pay their investors very different amounts. IRR and NPV.
• Leaving early is a negotiation with a stranger. A secondary sale of a fund interest needs the manager's consent, a buyer willing to take over the remaining commitment, and months. There is no bid on a screen to hit.
• Open-ended funds settle on a dealing calendar. Notice periods, dealing dates, lock-ups and gates all exist because the assets cannot be sold as quickly as an instruction can be given. Hedge fund.
• When it fails: everybody is transacting at the last value the administrator struck, and nothing behind it has been priced by a market since. A gate is the honest response to that. Continuing to redeem at a stale number is the other one.

Where the spread is, and who earns it

In public markets the cost is a spread you cross once. Here it is a fee structure that runs for a decade, and it is charged on bases that are not the same as the money at work.

• The management fee, on committed capital. During the investment period the fee is usually charged on what was promised, not on what has been drawn and put to work. The two differ by a large multiple in the early years, and the arithmetic of that gap is in the documents rather than in the headline percentage. Private equity.
• The performance fee, and the three words that change it. A hurdle sets what has to be earned first; a catch-up lets the manager take a disproportionate share once it is cleared; a high-water mark stops the same gain being charged for twice. A structure with a hurdle and a full catch-up is not the same product as one without, at the same stated percentages. Hedge funds.
• Fees at the other level. Monitoring fees, transaction fees and directors' fees charged to the companies the fund owns are paid by the fund's own assets. How much is credited back against the management fee is a negotiated number written in the agreement.
• The subscription line. Borrowing at fund level to delay calling money from investors shortens the period over which the return is measured. It raises the internal rate of return without changing the multiple of money returned — the same result, differently described. IRR and NPV.
• The secondary discount, which is the only external price. What somebody will actually pay for a fund interest is a number the reported valuation does not have to match. It is the closest thing this class has to a bid. Reading a market number.

How a position here ends

Every ending in this class takes months and needs somebody else's agreement. That is not a defect of the wrapper; it is the wrapper.

• The asset is sold, or listed. A trade sale, a sale to another fund, or a flotation. The last of these is the one that requires a market to be open, and markets are not open on a schedule.
• The fund's term ends. Ten years is the usual life, and extensions are usual too. The end of the term is when unsold assets have to become somebody's problem.
• A continuation vehicle. The manager sells the asset to a new fund it also manages, and existing investors are asked to take cash or roll. The buyer and the seller have the same name, which is why the process has its own governance and its own controversy.
• You sell your interest. A secondary sale, at a price negotiated against a reported value nobody outside has tested, and usually with the manager's consent required.
• It is written off. In venture this is the ordinary outcome for most of the portfolio rather than the exceptional one, and the arithmetic of the class assumes it. Venture capital.
• The queue. In an open-ended fund holding assets that are not, redemptions are met in order, or gated, or suspended. The instrument promised monthly liquidity and the assets never did. Liquidity.

Which risk decides across this class

Every product page here carries the same five bars. Read down the class instead of across one instrument, the question changes: is this a shelf of things that fail the same way, or a shelf of things that only share a department?

Which of the five decides what, across these 16

Counted from the same table each product page prints, so the two cannot disagree. Not a rating and not a ranking: it says which failure mode drives the outcome, not how dangerous anything is.

• Market3 of 16The price of the thing moves.Decides: Hedge Fund, Prediction Market, Unit-Linked Policy. Matters on 9 more.
• Credit4 of 16Somebody who owes you does not pay.Decides: Annuity, P2P & Marketplace Loan, Private Credit, Venture Debt. Matters on 7 more.
• Liquidity11 of 16You cannot get out at anything near the marked price.Decides: Hedge Fund, Infrastructure Funds, Life Settlement, Litigation Finance, Open-Ended Property Fund, Private Credit, Private Equity Fund, Royalty Stream, Timberland & Farmland, Venture Capital, Venture Debt. Matters on 5 more.
• Funding3 of 16Cash is needed before the position pays off — margin, calls, rolls.Decides: Infrastructure Funds, Private Equity Fund, Venture Capital. Matters on 7 more.
• Operational6 of 16The failure is in documents, systems, keys or people, not in prices.Decides: Catastrophe Bond, Life Settlement, Litigation Finance, P2P & Marketplace Loan, Prediction Market, Unit-Linked Policy. Matters on 9 more.

Liquidity decides 11 of the 16 — which is what makes this a class rather than a list: the instruments differ in shape and fail the same way.

The same five read across all 129 instruments →

Go deeper, and practiseLonger pieces, what an interview asks here, and a page to print.

Go deeper

Interactive: PE fund waterfall (simplified)Medium

Gross returns belong to the fund; what reaches the investor passes through fees, preferred return and carry. Follow the money:

Commitment ($m) Gross multiple on invested Fund life (years) Mgmt fee % p.a. Carry % Preferred return %

LP net multiple

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LP net IRR (approx.)

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GP take (fees + carry)

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GP share of gross profit

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Deliberately simplified: fees on committed capital throughout, full catch-up above the pref, no recycling or deal-by-deal timing. Real waterfalls differ in detail, never in direction — run a 2.2x gross and watch what fraction of profit crosses the table.

How this market works

Analysis

Closed-end funds: price versus net asset value

A closed-end fund has a fixed share count, so its price is set by supply and demand rather than by creation and redemption. It can and routinely does trade away from the value of what it owns.

Interactive: discount, re-rating and total returnMedium

Net asset value per share $ Market price $ Target discount at exit % (negative = discount) Holding period (years) Distribution yield %

Current premium / discount

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Gap per share

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Price at the target discount

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Return from re-rating alone

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Total, if NAV is flat

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Health warning

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A wide discount is only an opportunity if something forces it to close — a buyback programme, a continuation vote, a wind-up, or an activist. Absent a mechanism, discounts have persisted for decades, and buying one purely because it is wide is a bet on other people's future enthusiasm. The distribution yield here is on NAV, and a fund paying distributions out of capital is shrinking the NAV that the discount is measured against.

Market mapWho is on the other side of your trade

Prices are made by participants with different jobs, different constraints and different reasons to trade. Knowing whose need you are meeting explains more about a market than any indicator.

• Pension funds and endowments are the anchor investors, drawn by long horizons and, candidly, by smoothed reported volatility.
• Fund-of-funds and consultants intermediate much of the allocation, adding a second fee layer and a gatekeeping function of contested value.
• Sovereign wealth funds increasingly invest directly, competing with the managers they used to fund.
• Private wealth is the growth segment, reached through semi-liquid structures whose liquidity promises are the sector's main open question.
• The managers themselves are a participant: carried interest makes them long the upside and not symmetrically exposed to the downside.

Costly mistakesThe five mistakes that cost the most here

Not a list of ways to be clever — a list of the errors that recur, why each one is structural rather than careless, and which tool on this site settles it.

• Comparing IRR with a public-market return. IRR is time-weighted by capital deployment and can be managed with a credit line. Read it beside the multiple, always.
• Believing the reported volatility. Appraisal-based marks smooth the series and flatter every risk statistic — the measurement is calmer, not the asset.
• Underestimating the fee stack. Management fee, carry, fund expenses and, through a fund-of-funds, all of it twice. The waterfall tool shows what reaches you.
• Chasing last vintage's top quartile. Persistence in private-equity returns is weaker than the marketing implies, and vintage year often matters more than manager.
• Treating semi-liquid as liquid. Redemption gates exist and are used exactly when everyone wants out at once.

What an interview asks here

Alternatives questions test whether you can see through a reported return to what was actually earned, and whether you know where the fees really sit.

Try each one out loud before you open it. What is underneath is the shape of a complete answer, not a script — somebody who can produce those parts in their own words can also answer the four variations that follow, and somebody who has memorised a paragraph can answer one.

Q1Why is IRR not the same as a return?

What it is checking. The central measurement question in private markets.

A complete answer contains:

• IRR is the discount rate that sets the net present value of the cash flows to zero, so it is sensitive to timing as well as to amount.
• A quick early distribution can produce a high IRR on very little money actually returned.
• It also assumes interim distributions are reinvested at the same rate, which is rarely available.
• Which is why the multiple on invested capital is quoted alongside it: one measures speed, the other measures wealth created.
• And a subscription line that delays capital calls raises the reported IRR without changing anything the fund did.

Read it properly: IRR and NPV · The IRR calculator

Q2Walk me through a distribution waterfall.

What it is checking. The fee structure, and the details decide who actually gets what.

A complete answer contains:

• Return of contributed capital to the investors first.
• Then a preferred return, a hurdle rate, paid to investors before the manager participates.
• Then a catch-up, where the manager receives a large share until the agreed split is reached.
• Then the carried interest split on everything above.
• The details that matter: whether it is deal-by-deal or whole-fund, and whether there is a clawback if early winners are followed by losers.

Read it properly: The waterfall calculator · Costs and fees

Q3Why do private assets look less volatile than public ones?

What it is checking. A measurement question, and the answer is appraisal-based valuation.

A complete answer contains:

• They are valued periodically by appraisal rather than continuously by a market.
• Appraisals lag and smooth, so reported returns are autocorrelated and reported volatility is understated.
• That understates correlation with public markets too, which flatters every diversification statistic built on it.
• The underlying economic risk is not lower — it is measured less often.
• Which is why de-smoothing techniques exist, and why they raise both the volatility and the correlation substantially.

Read it properly: Alternatives · Risk measures

Q4What is a continuation fund and what is the tension in one?

What it is checking. A current-structures question with a genuine conflict at its heart.

A complete answer contains:

• The manager sells an asset from an existing fund to a new vehicle it also manages, funded by new investors.
• It gives existing investors liquidity and lets the manager hold an asset longer.
• The tension is that the manager is on both sides of the price — seller for one set of clients, buyer for another.
• Which is why an independent valuation, a genuine market check and an informed consent process are the governance around it.
• It is not improper by nature; it is a structure whose safeguards are the whole of the argument.

Read it properly: Continuation fund · Alternatives

Q5A fund reports 12% net. What do you want to know before believing it?

What it is checking. A scepticism question, and there is a checklist answer.

A complete answer contains:

• Net of what — management fee, carry, fund expenses, and whether a fund-of-funds layer sits on top.
• Over what period, and against which benchmark, measured how.
• Whether it is an IRR or a time-weighted return, because they answer different questions.
• How the unrealised portion is valued, and by whom.
• And survivorship: whether the track record includes the funds that were closed.

Read it properly: Costs and fees · The fee drag calculator

Q6What is the risk in a fund that offers daily liquidity on illiquid assets?

What it is checking. The 2019 case makes it concrete, and the answer is the mismatch.

A complete answer contains:

• The fund promises daily redemption; the assets take weeks or months to sell.
• In calm conditions flows net out and nobody notices.
• Under outflows the manager sells the liquid holdings first, because those are what can be sold — leaving remaining holders with a more illiquid fund.
• Which makes leaving the rational choice for everybody still in, and that is a run.
• Gates and suspensions stop it, and they arrive exactly when a holder most wants out.

Read it properly: Woodford, 2019 · When a fund stops withdrawals

Q7Why does a REIT behave differently from the property it owns?

What it is checking. A wrapper question, and the answer separates the asset from its listing.

A complete answer contains:

• A REIT is a listed equity, so it reprices continuously with the equity market and carries equity beta.
• The underlying property is appraised periodically, so it appears smoother and lags.
• The REIT is levered, which amplifies the property return in both directions.
• It also trades at a premium or a discount to net asset value, which is a sentiment variable the buildings do not have.
• So over long periods it tracks property, and over short ones it tracks the stock market.

Read it properly: REIT · The cap rate calculator

Do these against a clock → — one at a time, ninety seconds each, answer before you look.

Whose questions these are. Every question on this page was written for this publication. None is taken from anybody else’s question bank, and none is a claim about what any named firm asks — that is neither verifiable from here nor ours to assert. They are our own reading of which mechanism a question of this kind is testing. Information and education only.

Test yourself: five questions

Five quick questions on this asset class — checked entirely on your device, nothing stored or sent. Wrong answers come with explanations; the deep dives above hold every answer. For education only.

Interactive: the unrecoverable cost of owning vs. rentingEasy

Comparing a mortgage payment to a rent is the wrong comparison, because part of a mortgage payment buys equity. The right comparison is the money that disappears either way: interest, running costs and the return forgone on the deposit, against rent.

Purchase price $ Loan-to-value % Mortgage rate % Running costs % of price p.a. Monthly rent $ Assumed appreciation % p.a. Return on the deposit % p.a.

Mortgage interest

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Forgone on the deposit

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Running costs

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Assumed appreciation

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Cost of owning, per year

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Cost of renting, per year

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Breakeven appreciation

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Reading

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What it leaves out

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The breakeven appreciation line is the most useful output: it states the annual house-price growth required for owning to match renting on your own inputs, and leaves you to judge whether that is plausible. Transaction costs are deliberately excluded and are large — in many markets 5–10% of the price round trip, which dominates any holding shorter than several years. Nothing here is advice about a housing decision.

⬇ The whole class on one printable page

Who pays whom, drawn

The payoff charts on this site say what an instrument is worth at the end. These say who the parties are and what each one hands over — every payment between the investor and the bank on the other side, in the order it happens. Each diagram sits on its product's own page.

• Private Equity Fund — A commitment, then years of calls and distributions
• Hedge Fund — The dealing calendar is part of the product
• Annuity — Buying an income by giving up the capital
• P2P & Marketplace Loan — The platform is not the borrower and not a bank
• Private Credit — One lender, one borrower, no market in between
• Unit-Linked Policy — Three layers of charges between you and the fund
• Catastrophe Bond — A bond that stops being a bond when a disaster is measured
• Venture Debt — A loan that also wants a slice of the upside
• Litigation Finance — Paying for a case in exchange for part of the award
• Royalty Stream — Buying a percentage of revenue, not of profit
• Life Settlement — Who pays the premiums after the policy is sold

Who does this: Alternatives & Private Markets is quoted from five sell-side seats — Sales, Trading, Structuring, Research, Prime Services — and held from the buy-side by Asset Management, Private Markets, Hedge Funds & Alternatives, Wealth Management, Insurance & Pensions. See the industry map.