IRR is an Equal Opportunity Manipulator

Buyout funds are not the only ones striving for “Top Quartile” status to include in their communications and attract potential investors. In fact, they aren’t the worst offenders when it comes to false classification either.

More than a third of Fund of Funds that present themselves as top quartile performers are likely not to deserve the title. By using the PERACS Alpha, which eliminates for a variety of biases of IRR, we can get a more accurate assessment on which funds are top performers and which funds are lower on the totem pole. Of all those that claim Top Quartile by using IRR an estimated 21%, 11% and 4% belong in the 2nd, 3rd and 4th quartiles respectively.

Moreover, a third of funds who could claim 2nd quartile status are actually in the top quartile, begging the question, how much can you trust IRR?

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