Manager
Selection
&
Alpha
Tracking
Measuring MANAGER ALPHA matters
The performance of private fund managers is often evaluated by comparing reported IRRs and TVPI multiples with peer group benchmarks that lack in both representativity and robustness .
Moreover such peer group data does not allow measuring the market outperformance of a fund or a manager since they are not market benchmarks but only represent peers i.e., other active managers, but without enough granularity to make like-for-like comparisons between managers.
Yet, measuring manager alpha matters since this is implictly the basis on which any investor in private assets decides to mandate a manager: to deliver exposure to the private asset market and to perform at least as well, if not better.
USe PRIVATEMETRICS to measure fund manager alpha
privateMetrics market indices capture of the dynamics of the broad market and can be used as asset allocation or global strategy benchmarks. They include the private2000® and the infra300® indices.
privateMetrics also includes thematic indices that focus on specific segments of private markets such as sector and geographies but also business or customer model, and style factors like size or revenue growth. Such indices can be combined and used to create a new benchmark that is representative of an investors choice of strategy or exposure to private markets.
Using the privateMetrics market and thematic indices or custom benchmarks, it is possible to measure the alpha of a private fund using the fund cash flows and the direct alpha method.
With the approach, investors can be build a private market equivalent that genuinely represents the difference between the fund performance and that of the most relevant market i.e., the market for private equities or private infrastructure.
MEASURE FUND MANAGER ALPHA IN Three SIMPLE STEPS USING PRIVATEMETRICS
Select the relevant broad market and strategy benchmarks
Given a private fund, select a corresponding privateMetrics broad market index, for example the private2000 index for global private equities and a strategy index corresponding to the fund's style e.g., US Tech Mid-Cap.
Get the fund data needed to compute Direct Alpha
For the same fund, all historical cash flow and NAV data are required to apply the Direct Alpha methodology as defined by Gredil et al (2014, SSRN).
Find Total Alpha, Style Alpha and Pure Alpha for the fund
Using the two privateMetrics benchmarks selected above and the fund cash flow and NAV data, it is possible to compute Total Fund Alpha (relative to the Broad Market, Pure Alpha (relative to the Style Benchmark) and Style or Asset Allocation Alpha (the difference between Total and Pure Alpha)
Want to know more?
Contact a member of our team.privateMetrics® insights
the EDHEC Infrastructure & Private Assets Research Institute
