Lesson 1 of 8 · 12 min
Why appraisal is harder: the life cycle and the J-curve
Alternative 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.
In short
- Listed stocks and bonds are standardised claims with continuous prices, large peer groups and common indexes, so comparing their performance is easy.
- Alternatives complicate appraisal through the timing of cash flows, borrowed funds, valuation of illiquid positions and complex fees, tax and accounting.
- A typical fund passes through capital commitment, capital deployment and capital distribution.
- Returns are usually negative early on and accelerate later, tracing a J-curve; they flatten as assets are sold and the fund winds down.
- Alternative returns are also less normally distributed, so standard risk and return measures can mislead.
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