Discuss what investors should assess when allocating to each kind of alternative investment

Key points differ by type but follow common themes. Assess the expected return and risk after unsmoothing, and how returns depend on leverage. Consider liquidity: lock-ups and capital calls in private funds versus monthly or quarterly dealing, which can be gated, in many hedge funds. Evaluate fees, including management and performance fees and their structure, since they take a larger share of gross return than in traditional assets. Manager selection matters more because return dispersion among managers is wide in private equity and hedge funds. Also consider vehicle structure, transparency, tax treatment and operational due diligence. The trap is judging an alternative by top-quartile manager returns when the investor may only gain access to average managers.