AI Summary
→ WHAT IT COVERS Aravind Sithamparapillai examines alternative investments through rigorous due diligence, revealing misleading marketing tactics, hidden fee structures, performance measurement flaws, and operational risks that most financial advisors overlook when allocating client capital to private funds. → KEY INSIGHTS - **Expected Return Framework:** Calculate net expected returns by starting with gross asset class return, adding leverage impact, then subtracting interest costs, management fees, and performance fees. One private real estate fund analysis yielded only 8% expected return versus 6.5-7% for public equities, insufficient premium for illiquidity risk. - **Duration Mismatch Red Flag:** A private mortgage investment corporation claimed loans hadn't renewed yet to explain flat returns despite rising rates, but admitted average duration under two years. They were extending loans at old rates because property values fell 30%, preventing defaults that would trigger NAV markdowns. - **Performance Fee Asymmetry:** With 20% performance fees, investors pay full fees on winning deals but receive no rebate on losers. As return variance increases across deals, performance fees can consume enough gains from winners to leave investors net negative despite 10% average gross returns across the portfolio. - **Benchmark Manipulation:** Private fund marketing compares gross benchmark returns against public indices without adjusting for fees. One private credit fund showed 9% returns matching S&P 500, but charged 1.5% management fee plus 15% performance fee above 5% hurdle, dramatically reducing actual investor returns. - **Rebalancing Impossibility:** Non-correlation benefits require timely rebalancing, but private funds often have quarterly redemptions, six-month lock-ups, or gating provisions. During 2022 market volatility, investors couldn't sell appreciated alternatives to buy discounted public equities, negating the diversification benefit entirely. → NOTABLE MOMENT At a 2023 conference, a presenter accidentally said "oh no" into the microphone when Aravind raised his hand again after catching contradictory statements about mortgage renewal timelines and portfolio duration, revealing the fund was extending loans to avoid marking down underwater properties. 💼 SPONSORS None detected 🏷️ Alternative Investments, Due Diligence, Private Equity, Financial Planning, Investment Fees