The Galapagos Islands of Finance

The signature pattern of the markets in which alternative investors operate in consists of fleeting opportunities with limited lifetimes, fuzzy boundaries and overlaps with other asset classes, lack of public data, reliance on qualitative judgment and, as a consequence, great scope for a cult of personalities with investment managers sometimes behaving like prima donnas not much different from artists and actors. There is a convergence between private equity, hedge funds and other forms of alternative investing, rendering clear classifications impossible.1 Modern Portfolio Theory (MPT) provides the theoretical basis for investors’ acceptance of alternative assets in general. Adding non-correlated assets, such as private equity, to a portfolio of publicly quoted securities can improve the portfolio’s risk and return characteristics. However, private equity does not sit well within the world of efficient markets, where an asset can be traded over the short term and prices are on average close to its true economic value.