Alternative Investment Performance and ReturnsLocked: included in All Access

Why alternative investments are harder to appraise than listed stocks and bonds (life cycle, leverage, valuation and fees), how IRR and MOIC measure their returns, and how management fees, performance fees, hurdles, catch-ups, high-water marks, clawbacks and fund-of-funds layers turn a gross return into the net return a particular investor actually earns.

1. 1. Why appraisal is harder: the life cycle and the J-curveAlternative investments are customised, long-lived and lumpy in their cash flows, so a simple period return tells you far less than it does for a listed share or bond.Locked: included in All Access12 min
2. 2. Measuring returns: IRR versus MOICIRR captures both the size and the timing of a fund's cash flows, so it is the preferred measure; MOIC is a quick multiple that ignores how long the money was tied up.Locked: included in All Access13 min
3. 3. Leverage: magnifying gains and lossesBorrowing lets a fund hold a position larger than its own capital, so the leveraged return equals the asset return plus a magnified spread between that return and the borrowing rate.Locked: included in All Access11 min
4. 4. Valuation: fair value levels and smoothed returnsIlliquid alternatives are often valued by models rather than prices, which tends to smooth reported returns and understate their true volatility.Locked: included in All Access11 min
5. 5. Fees, custom terms and redemption provisionsAlternative funds charge a management fee plus a performance fee, with terms that vary by investor; the order in which fees are calculated changes the net return.Locked: included in All Access14 min
6. 6. Hurdle rates, catch-up, waterfalls and clawbackHurdles make the manager earn a minimum return for investors before taking a performance fee, and clawbacks make sure the fee reflects the fund's overall result, not its best early deals.Locked: included in All Access15 min
7. 7. High-water marks, investor timing and either/or feesA high-water mark stops the manager charging performance fees twice on the same gains, which means investors who entered at different times pay different fees for the same fund performance.Locked: included in All Access13 min
8. 8. Funds of funds, benchmarks and index biasesA fund of funds adds a second layer of fees on top of the underlying funds' fees, and hedge fund indexes overstate typical returns because failed funds drop out and only winners get backfilled.Locked: included in All Access12 min