Do the Unrealized Gains in Alternative Assets Ever Become Realized?

Abstract

Alternative asset funds often market a new fund during the lifetime of other funds under the stewardship of common management. The marketing materials of the new fund include the interim results of the existing funds, which are self-reported. The research question before the authors was whether the self-reported interim rate of return would actually be realized by the investor when all was said and done. The authors hypothesized that funds currently marketing new funds would have an incentive to overstate the interim rates of return and that firms that were not marketing new firms would not. The results were somewhat mixed but clearly did not support the hypothesis. Of the eight funds that were in the process of marketing, three had returns that were overstated and five had returns that were understated (when comparing the self-reported returns to our recalculated returns). For the six funds that were not marketing new investments, three had returns that were overstated, two were understated, and one had returns where the reported and calculated returns matched. Further parsing the data by only looking at differences greater than 10% between reported and calculated returns, in each case only one fund reported higher rates of return than calculated.