The market at a glance
Alternatives are everything that doesn't trade on a public screen: private equity (~$8tn AUM), private credit (~$2tn), venture capital, hedge funds (~$4-5tn), real assets and insurance-linked securities — together well over $20 trillion, and the fastest-growing corner of institutional portfolios. 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.
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.