Alternative Investments Glossary
Terms are grouped by theme. Each definition is intentionally brief. Follow the links for detailed treatment.
Fund Structure Terms
Limited Partnership (LP) — The dominant legal structure for closed-ended alternative funds. Combines a GP (manager) and one or more LPs (investors) under a single agreement. See limited-partnerships.
General Partner (GP) — The fund manager with full decision-making authority, unlimited liability, and fiduciary responsibility to LPs. See gp-lp-roles.
Limited Partner (LP) — An investor with limited liability and no management role. Commits capital; receives returns. See gp-lp-roles.
LPA (Limited Partnership Agreement) — The governing legal contract of a fund. Sets out fees, waterfall, LPAC rights, key-person provisions, and all terms between GP and LPs.
LPAC (Limited Partner Advisory Committee) — A committee of LP representatives with oversight and consent rights on specific GP decisions, notably conflicts of interest.
Closed-Ended Fund — Fixed capital raise, defined term, no redemptions. Capital returned via distributions at exit. See open-ended-vs-closed-ended-funds.
Open-Ended Fund — No fixed end date; investors can subscribe or redeem periodically, subject to notice periods and gates. See open-ended-vs-closed-ended-funds.
Fund of Funds (FoF) — A fund that invests in other funds rather than directly. Adds diversification at the cost of double-layer fees. See fund-of-funds.
Co-Investment — A direct investment in a deal alongside a fund, typically at reduced fees. See co-investments.
Secondary — Purchase of an existing fund interest or portfolio from another investor, not from the GP at inception. See secondaries.
Separately Managed Account (SMA) — A bespoke mandate for a single large investor, with customised strategy, reporting, and governance. See separate-managed-accounts.
Capital Activity Terms
Commitment — The total amount an investor pledges to a fund; drawn down over the investment period via capital calls. See capital-commitments.
Capital Call / Drawdown — A request from the fund to LPs to transfer a portion of their committed capital. See capital-calls.
Unfunded Commitment — Committed capital not yet called. Represents a future liability for the LP.
Subscription — The process of formally joining a fund. In closed-ended funds, this is signing legal documents; in open-ended funds, it involves transferring capital at NAV. See subscriptions.
Distribution — Return of capital or profits from the fund to LPs. May be recallable or non-recallable. See distributions.
Recycling — Reinvesting exit proceeds within the fund rather than distributing them immediately. Keeps DPI at zero until recycled capital is deployed and exited again. See recycling-provisions.
Subscription Line Facility — A short-term credit line used by the fund to bridge capital calls. Boosts reported IRR by shortening the apparent investment period. See capital-calls.
Equalisation — The mechanism adjusting late-close investors’ economics so all LPs are on equivalent footing regardless of when they joined. See equalisation.
Investment Period — The defined period during which a closed-ended fund’s GP can call capital for new investments. Typically 4—6 years from first close. After the investment period ends, capital may still be called for follow-on investments in existing portfolio companies, expenses, and management fees, but not for new platform positions. The management fee base often steps down at the end of the investment period.
Commitment Period — The period during which LPs remain bound by their capital commitments and cannot withdraw them without GP consent. Usually coincides with or slightly exceeds the investment period. Related to, but distinct from, the investment period.
NAV and Valuation Terms
NAV (Net Asset Value) — Fund assets minus liabilities, expressed per unit or for the whole fund. The basis for LP capital accounts and performance metrics. See nav.
GAV (Gross Asset Value) — Total assets before deducting liabilities (e.g., fund-level debt). NAV = GAV − liabilities.
Fair Value — The estimated price at which an asset would sell in an orderly market transaction. The basis for private capital valuation under IFRS 13 and ASC 820.
Level 1 / 2 / 3 Inputs — The IFRS 13 / ASC 820 hierarchy for valuation inputs. Level 1 = observable quoted prices; Level 2 = observable indirect inputs; Level 3 = unobservable, model-based. Most private fund holdings are Level 3. See valuation-risk.
Mark-to-Model — Valuing an asset using internal models and assumptions rather than observable market prices. Typical for Level 3 assets.
Stale Price — A valuation that has not been updated for a material period, potentially misrepresenting current fair value.
PIK Interest (Payment in Kind) — Non-cash interest added to loan principal rather than paid in cash. Accrues to NAV/income but no cash is received until repayment. See private-credit.
Performance Metrics
IRR (Internal Rate of Return) — The annualised return that makes the NPV of all cash flows zero. Time-sensitive. See irr.
MOIC (Multiple on Invested Capital) — Total value returned ÷ total capital invested. Time-insensitive. See moic.
TVPI (Total Value to Paid-In) — DPI + RVPI; total value (realised + unrealised) per unit of called capital. See tvpi.
DPI (Distributions to Paid-In) — Cash actually returned to LPs ÷ capital called. The hard, realised measure. See dpi.
RVPI (Residual Value to Paid-In) — Remaining fund NAV ÷ capital called. The soft, unrealised measure. See rvpi.
PME (Public Market Equivalent) — Compares private fund returns to a hypothetical investment in a public index over the same period. See public-market-equivalent.
Gross IRR vs Net IRR — Gross = before management fees and carry; Net = what LPs actually receive. The gap matters.
J-Curve — The typical pattern of early negative returns followed by recovery and gain, driven by fees and unrealised assets early in fund life. See j-curve.
Vintage Year — The year a fund makes its first investment or first capital call. The primary grouping dimension for private fund performance benchmarking, because funds investing in the same year face similar entry valuations and market conditions. See vintage-year.
Sharpe Ratio — Risk-adjusted return measure: (Portfolio Return minus Risk-Free Rate) divided by standard deviation of returns. Most useful for liquid alternative strategies (hedge funds, CTAs). Misleading for illiquid private markets, where infrequent valuations artificially lower reported volatility and inflate the Sharpe Ratio. See sharpe-ratio.
Volatility — Annualised standard deviation of returns. In private markets, reported volatility is systematically lower than true economic volatility because assets are valued infrequently. Low reported volatility in a private fund does not mean the underlying assets are inherently less risky. See volatility.
Risk Terms
Illiquidity Risk / Liquidity Risk — Risk that capital cannot be accessed or an asset sold at fair price when needed. See liquidity-risk.
Valuation Risk — Risk that stated asset value does not reflect true market value, particularly for Level 3 assets. See valuation-risk.
Leverage Risk — Risk that borrowed capital amplifies losses beyond the decline in the underlying asset. See leverage-risk.
Concentration Risk — Risk from excessive exposure to a single asset, manager, sector, geography, vintage, or liquidity type. See concentration-risk.
Operational Risk — Risk from failed processes, systems, or human error — independent of investment performance. See operational-risk.
Currency Risk — Risk that FX rate movements reduce home-currency returns. See currency-risk.
DSCR (Debt Service Coverage Ratio) — Operating cash flow divided by total debt service (interest plus scheduled principal). A key covenant metric in private credit, infrastructure, real estate, and LBO financing; a ratio below 1.0x signals that operations cannot cover debt obligations. See debt-service-coverage-ratio.
NAV Facility — A fund-level credit line secured against the net asset value of the fund’s portfolio rather than against LP commitments. Used for liquidity management, follow-on investment, and (controversially) funding LP distributions before realisations. Introduces structural subordination of LP interests and transparency considerations. See nav-facilities.
Clawback — A contractual right allowing LPs to recover carried interest already paid to the GP if, at the end of the fund’s life, the GP has received more carry than the total fund performance entitles. Most relevant in American (deal-by-deal) waterfall structures. Enforcement is often difficult once carry has been distributed to individual partners. Clawback escrow arrangements partly mitigate this risk. See clawback.
Operations and Reporting Terms
KYC / AML — Know Your Customer / Anti-Money Laundering. The regulatory due diligence process that must be completed before an investor can be onboarded. See onboarding-and-kyc.
UBO (Ultimate Beneficial Owner) — The natural person(s) who ultimately own or control an investing entity; must be identified under FATF-derived AML rules.
Capital Account Statement — An LP’s individual statement showing contributions, distributions, unrealised value, and fees paid.
Quarterly Report — The primary periodic investor communication: fund performance, portfolio updates, NAV, and forward-looking commentary.
Gate — A limit on total redemptions per period in an open-ended fund, preventing a run on the fund. See open-ended-vs-closed-ended-funds.
Side Pocket — Illiquid or hard-to-value assets segregated in an open-ended fund; investors cannot redeem this portion until realisation.
Hurdle Rate / Preferred Return — The minimum return LPs must receive before the GP earns carried interest. Typically expressed as an annual rate.
High Water Mark (HWM) — In hedge funds, performance fees are only charged on gains above the previous NAV peak. Protects investors from paying fees on recovered losses.
Source and Standards Terms
ILPA — Institutional Limited Partners Association. Publishes reporting templates (ILPA Templates) and governance principles (ILPA Principles).
IPEV — International Private Equity and Venture Capital Valuation Board. Publishes fair value guidelines for private capital valuations. See ipev-valuation-guidelines.
IFRS 13 — IASB accounting standard defining fair value and the Level 1/2/3 hierarchy. See ifrs-13-fair-value.
ASC 820 — FASB equivalent of IFRS 13 under US GAAP. Applies to US-domiciled funds. See asc-820-fair-value.
AIMA — Alternative Investment Management Association. Publishes DDQs for hedge fund due diligence. See aima-ddqs.
SBAI — Standards Board for Alternative Investments. Comply-or-explain governance and operational standards for alternatives managers. See sbai-standards.
FATF — Financial Action Task Force. Sets the international AML/CTF standard underlying KYC obligations. See fatf-recommendations.
INREV — European Association for Investors in Non-Listed Real Estate Vehicles. Publishes reporting and NAV standards for real estate funds. See inrev-guidelines.
RICS Red Book — RICS Valuation – Global Standards; the professional framework for property valuations underpinning real estate fund NAV. See rics-red-book.
FATCA (Foreign Account Tax Compliance Act) — US law requiring financial institutions outside the US to identify and report accounts held by US persons to the IRS, typically via local tax authorities under bilateral Intergovernmental Agreements. Alternative funds are generally treated as Financial Institutions subject to direct reporting obligations. See crs-fatca.
CRS (Common Reporting Standard) — The OECD’s multilateral tax transparency framework; the international equivalent of FATCA. Participating jurisdictions require domestic financial institutions to identify accounts held by tax residents of other participating jurisdictions and exchange the data automatically. See crs-fatca.
AIFMD (Alternative Investment Fund Managers Directive) — EU directive regulating alternative investment fund managers. Requires authorisation, depositary appointment, risk and liquidity management frameworks, and periodic regulatory reporting. Annex IV reporting (under Article 24) is the primary systemic risk data submission. See aifmd-annex-iv.
Responsible Investment (RI) / ESG — Integration of environmental, social, and governance factors into investment decision-making and asset management. In alternatives, covers due diligence screening, active ownership practices, ESG data collection from portfolio companies, and investor reporting. Regulatory frameworks include EU SFDR and UK SDR. See responsible-investment.
Asset Class Notes
Commodity Exposure — Investment exposure to physical goods (energy, metals, agricultural products) through physical ownership, futures contracts, commodity equities, or commodity-linked infrastructure. Returns are driven by supply/demand fundamentals, roll yield (from the futures curve shape), inflation sensitivity, and geopolitical factors. Key risks include roll yield drag in contango markets, price volatility, and currency risk (most commodities are USD-priced). Futures-based strategies require active margin management. See commodities.
Digital Assets — Assets existing in digital form on blockchain technology, including cryptocurrencies (Bitcoin, Ether), stablecoins, tokenised real-world assets, and digital asset funds. Institutional exposure can be direct (token ownership), through fund vehicles, or via infrastructure/venture investments. Key operational risks include custody (private key management, exchange counterparty risk), extreme price volatility, regulatory uncertainty, and valuation difficulty for non-listed assets. Institutional due diligence requires specific custody and technical review beyond standard alternatives DDQ. See digital-assets.