Time-Zero Direct Alpha: Investment-Level Calculations for Improved Skill Evaluation

This article introduces the time-zero direct alpha approach for estimating the outperformance of a private market investment portfolio relative to benchmark(s). To the authors’ knowledge, this is the first published method for private markets to remove the impact of investment timing and accommodate multiple underlying investments with distinct benchmarks in a rigorous manner, without relying on unreliable heuristics. As demonstrated in the article, these problems of investment timing and unobservable subportfolio weights over time can add meaningful noise to estimates of relative performance. This method builds upon the commonly used direct alpha measure for comparing private market returns to public benchmarks. The authors believe that time-zero direct alpha can give private market analysts valuable information for manager selection, portfolio construction, and liquidity planning.