Cash Dilution in Illiquid Funds
Cash dilution, the effect of performance reduction through cash, exists in almost every illiquid fund. This article provides a brief overview of the problems of cash dilution in illiquid private equity fund of funds, a formula for the calculation of the cost of cash dilution, two possible solutions for the reduction of cash dilution (namely the over-commitment strategy and a formula to calculate the optimal degree of investment in other assets), an evaluation of the effect of cash dilution in private equity fund of funds, and an evaluation of the usefulness of the over-commitment strategy.
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