H I G H P R I O R I T Y — C A S E S T U DY C H A P T E R

Fee Structure & Fund Performance

Chapter 9 · Weightage: Very High — Numerical Case Studies

Risk metrics: Std Dev · Skewness · Kurtosis · MDD

09
Return metrics: IRR · J-Curve · TVPI · DPI · RVPI · KS-PME · Direct Alpha

Risk-return: Sharpe · Treynor · VaR

Excel functions: =XIRR · =SKEW · =KURT

SECTIONS

1. CAGR & Gross vs Net Returns

2. Risk Metrics — Standard Deviation, Skewness, Kurtosis, MDD

3. Return Metrics — IRR (Gross & Net), J-Curve

4. Multiples — PIC, DPI, RVPI, TVPI, MOIC

5. KS-PME & Direct Alpha

6. Risk-Return Metrics — Sharpe, Treynor, VaR

7. All Formulas — Quick Reference

8. Practice Questions — 20 MCQs

S E C T I O N 9 . 3 . 3 & B O X 9 .1

CAGR & Gross vs Net Returns

CAGR FORMULA

CAGR = (End Value / Begin Value)^(1/n) − 1

n = number of years. Measures annualised growth accounting for compounding.

GROSS RETURN (PRE-EXPENSE)

Return = (GAV / Initial Investment) − 1

Based on Gross Asset Value — BEFORE management fee, incentive fee, expenses.

NET RETURN (POST-EXPENSE, PRE-INCENTIVE)

Return = (NAV Pre-Incentives / Initial) − 1

After expenses + management fee, but BEFORE incentive fee.

R E T U R N H I E R A R C H Y — A L WAY S D E C R E A S I N G

Gross Return (highest — no deductions)

minus Set-up costs, Fund expenses, Management fees (+ GST)
Net Return Pre-Incentives
minus Incentive / Performance Fees
Net Return Post-Incentives
minus Direct Taxes (LTCG, etc.)
Post-Tax Net Return (lowest — what investor actually receives)

G S T I M PAC T — C R I T I C A L N U M B E R

GST at 18% is levied on: Management Fees · Trusteeship Fees · All external
service provider fees (Fund Admin, Custodian, Auditor, Legal, etc.). GST is a
non-recoverable cost for AIFs (they don't provide output services, so no
 input credit). Impact can be as high as 0.81% of Gross NAV when all service
fees are considered.

SECTION 9.6

Risk Metrics

Standard Deviation

Measures historical volatility of returns around the mean. Higher σ =

higher risk.

STANDARD DEVIATION

σ = √[ Σ(Ri − R
̄ )² / n ]

̄ = mean return · n = number of years

Ri = return in year i · R

MEAN RETURN

̄ = ΣRi / n
R

Simple arithmetic average of historical returns.

WO R K E D E X A M P L E — F U N D A V S F U N D B ( 5 Y E A R S )

Fund Y1 Y2 Y3 Y4 Y5 Mean σ

Fund
12.50% 11.25% 13.65% 17.30% 14.65% 13.87% 2.06%
A

Fund
21.50% −0.50% 16.75% 20.25% 21.90% 15.98% 8.44%
B
 Fund B: higher mean (15.98% vs 13.87%) but 4× more
volatile — prudent investor chooses Fund A

Skewness & Kurtosis

Both measure the shape of the return distribution relative to a normal

distribution (which is perfectly symmetric with kurtosis = 3).

Mean=Mode (symmetric)
Normal Distribution
Skewness = 0 · Symmetric. Mean = Mode = Median. Kurtosis = 3.

Mode

Right
Mean tail
> Mode
Positive Skew (Skew > 0)
 Long right tail · Positive outliers · Mean > Mode · Preferred over negative skew

Mode

Mean Left
< Mode
tail — risky
Negative Skew (Skew < 0)
Long left tail · Negative outliers · Mean < Mode · Risky — investors dislike

NORMAL EXCEL
MEASURE > NORMAL < NORMAL
VALUE FUNCTION

Skewness =0 Positive: Negative: left =SKEW(range)

(symmetric) right tail, tail, negative
positive outliers, Mean
outliers, < Mode —
Mean > RISKIER
Mode

Kurtosis =3 Leptokurtic: Platykurtic: =KURT(range)

(normal) · >3, fatter <3, consistent
Excess tails, higher frequencies,
Kurtosis = peaks = thinner tails =
0 MORE RISK LESS RISK

KURTOSIS EXAM TRAP

Excel's KURT function returns Excess Kurtosis (= Kurtosis − 3). So Fund A

with KURT=1.162 has actual kurtosis of 1.162 (below 3 = platykurtic = less
risky). Fund B with KURT=5.034 has actual kurtosis of 5.034 (above 3 =
leptokurtic = more risky). Always compare to 3, not 0, when using absolute
 kurtosis values.

Maximum Drawdown (MDD)

MAXIMUM DRAWDOWN

MDD = (Trough Value − Peak Value) / Peak Value

Peak-to-trough decline in AUM during a reporting period. Always a negative

percentage. Investors prefer MDD closest to zero.

WO R K E D E X A M P L E — F U N D P Q R ( Q 1 2 0 2 0 )

Fund PQR: Peak AUM = ₹632.33 crore (Feb 14). Trough AUM = ₹545.61
crore (Mar 31). NIFTY50: Peak = 12,430.50 · Trough = 7,610.25

MDD (Fund PQR) = (545.61 − 632.33) / 632.33 = −86.72 /

632.33

Fund MDD = −13.71% vs NIFTY50 MDD = −38.78%

Fund PQR outperformed benchmark significantly on downside protection — even

in COVID crash (March 2020), fund lost only 13.71% vs index losing 38.78%.

S E C T I O N 9 . 7.1 & 9 . 7. 3

Return Metrics — IRR (Gross & Net), J-Curve

IRR TYPE DEFINITION WHAT IS INCLUDED RESULT

Gross Rate of Cash outflows = capital calls HIGHEST IRR

IRR return at only. Cash inflows = gross asset — shows raw
FUND value at end. Excludes all fees, investment
level expenses, taxes. performance
 before any
deductions

Net IRR Rate of All outflows: capital calls + setup LOWER —

return at cost + annual expenses + what investor
INVESTOR management fees + incentive actually earns.
level after fees + taxes. Cash inflow = final Net IRR <
all distribution. Gross IRR
deductions always.

Since- IRR from All cash flows from fund Also known as
Inception launch inception Lifetime IRR if
IRR date to fund is
current liquidated
reporting
date

WO R K E D E X A M P L E — G R O S S V S N E T I R R ( F U N D A B C , 5 -Y E A R C LO S E -
ENDED)

Committed Capital = ₹50 crore. Buy-and-Hold strategy — all assets

distributed at end of Year 5.

Gross
Gross IRR Gross Net Distribution at
Scenario NAV at Net IRR
Formula IRR Y5
Year 5

₹102.62 crore
Best- ₹115 50 =
18.13% (after fees & 12.98%
case crore 115/(1+r)⁵
tax)

₹66.32 crore
Worst- 50 =
₹70 crore 6.96% (after fees & 3.47%
case 70/(1+r)⁵
tax)

Best-case: Net IRR (12.98%) is 5.15% below Gross IRR

(18.13%) due to high fixed costs & incentive fees

Excel function: =XIRR(values, dates, 0) — takes exact dates, handles irregular cash
flows.
 The J-Curve

The J-Curve describes the IRR pattern of Category I and II AIFs (close-
ended, illiquid) over their life cycle.

J - C U R V E — I R R B E H AV I O U R OV E R F U N D L I F E

Maturity years:
Positive & stable IRR
IRR / Cash Flow

(exits + distributions)

0%

Vintage years:
Negative IRR
(fees + investment,
no exits yet)

Y1 Y2 Y4 Y6 Y8 Y10
Fund Year

J - C U R V E — 5 K E Y TA K E AWAY S

Early years (vintage): IRR negative — capital being drawn down, fees
charged, no exits yet
Mid years (Y4+): Portfolio companies mature, exits start, distributions
flow IRR turns positive
Peak IRR: Typically around Year 8 when most exits and distributions are
completed
Late years (Y9-10): IRR stabilises at peak — few remaining distributions
J-Curve explains why Cat I & II AIF investors must have long holding
capacity and patience

S E C T I O N 9 . 7. 4

Performance Multiples — PIC, DPI, RVPI,

TVPI, MOIC
PIC MULTIPLE (PAID-IN CAPITAL)

PIC Multiple = Capital Drawn / Committed Capital

How "invested" is the fund? e.g. ₹800Cr drawn / ₹1000Cr committed = 0.80 (80%).
High PIC = end of drawdown phase.

DPI — DISTRIBUTED TO PAID-IN CAPITAL

DPI = Total Distributions / Total Capital Contributions

Also called "Realisation Multiple." How much has been paid back. DPI > 1 = investor has
received MORE than invested. Only realised gains.

RVPI — RESIDUAL VALUE TO PAID-IN

RVPI = AUM (Unrealised) / Total Capital Contributions

Also called "Unrealised Multiple." Current portfolio value yet to be distributed. Estimate-
based — subject to valuation methodology.

TVPI — TOTAL VALUE TO PAID-IN

TVPI = DPI + RVPI

OR: (Cumulative Distributions + Unrealised Value) / PIC. Fundamental metric for private
fund performance. Also called "Net Multiple." Fluctuates until fully realised.

MOIC — MULTIPLE ON INVESTED CAPITAL

MOIC = (Realised + Unrealised Value) / Total Invested

Capital

When all capital calls are met (invested = paid-in), MOIC = TVPI. Large MOIC-to-RVPI
gap revisit unrealised asset valuations (red flag).

D P I + R V P I = T V P I ( A L WAY S , U N T I L F U N D I S W O U N D U P )
 Before investments start: TVPI < 1 (corpus reduced by fees/expenses)
During investment period (vintage years): TVPI mainly = RVPI (mostly
unrealised)
As exits happen: DPI rises, RVPI falls
When fully distributed: DPI = TVPI · RVPI = 0

Q U I C K N U M E R I CA L — D P I , RV P I , T V P I

Fund: Committed & Called = ₹1,000 crore. Total distributions to date = ₹400
crore. Current AUM (unrealised) = ₹1,100 crore.

DPI = 400 / 1000 = 0.40 (40%)

RVPI = 1100 / 1000 = 1.10

TVPI = DPI + RVPI = 0.40 + 1.10 = 1.50

TVPI of 1.50 means every ₹1 invested has generated ₹1.50 in total value (realised +
unrealised).

S E C T I O N 9 . 7. 5 & 9 . 7. 6

KS-PME & Direct Alpha

KS-PME (Kaplan-Schoar Public Market Equivalent)

Used for Category I & II AIFs to compare performance against the public
markets (since these funds invest in unlisted companies, no direct index
benchmark exists).

KS-PME — HOW IT WORKS

Step 1: Compound all capital calls to the valuation date using actual market
index returns.
Step 2: Compound all distributions to the valuation date using actual market
 returns.
Step 3: KS-PME = (Sum of FV Distributions + NAV) / Sum of FV Capital Calls

Interpretation: KS-PME > 1 AIF outperformed the market · KS-PME < 1

market outperformed AIF

WO R K E D E X A M P L E — KS - P M E

Year Capital Calls Distribution Market Return FV of Cap Calls (to Y4)

Y0 −20 0 18% −44.55

Y1 −30 0 14% −56.63

Y2–Y3 0 0 16%, 22% 0

Y4 0 20 17% —

Unrealised NAV at Y4 120

KS-PME = (FV Distributions + NAV) / FV Capital Calls =

(20 + 120) / (44.55 + 56.63)

KS-PME = 140 / 101.18 = 1.38

KS-PME = 1.38 > 1 → AIF significantly outperformed

the market index ✓

Direct Alpha

A variation of KS-PME that directly quantifies the alpha (excess return) as

a percentage over market returns.

D I R E C T A L P H A — M E T H O D O L O G Y & R E S U LT

Using the same cash flows and market returns, the IRR of the net cash flows
(when market returns are used as compounding factor) directly gives the
alpha.
 From the KS-PME example above:
Fund IRR = 35% (calculated using XIRR on net cash flows)
Direct Alpha = 10% (using IRR function with market-adjusted cash flows)
This means the market delivered 25% IRR, and the fund delivered 35% —
direct alpha of 10% over market.

SECTION 9.9

Risk-Return Metrics — Sharpe, Treynor, VaR

SHARPE RATIO

Sharpe = (Rp − Rf) / σp

Excess return per unit of TOTAL risk (standard deviation). Higher Sharpe > 1 preferred.
Use for comparing undiversified portfolios.

TREYNOR RATIO

Treynor = (Rp − Rf) / β

Excess return per unit of SYSTEMATIC risk (beta). Based on premise that only non-
diversifiable risk should be compensated. Better for well-diversified portfolios.

VALUE AT RISK (VAR)

Max loss at a given confidence level over a time period

e.g. "95% 1-month VaR = ₹1 crore" means 95% probability that fund WON'T lose more
than ₹1 crore in the next month. Lower VaR preferred.

METRIC SHARPE RATIO TREYNOR RATIO

Risk measure Total risk (σ — standard Systematic risk only (β —

used deviation) beta)
 Best suited for Undiversified portfolios / Well-diversified portfolios
comparing standalone funds

Interpretation Return per unit total risk — Return per unit systematic
higher is better risk — higher is better

When they Well-diversified portfolios (where β ≈ σ)

give same
result

WO R K E D E X A M P L E — S H A R P E & T R E Y N O R ( 5 A I F ST R AT E G I E S , R F =
5.6 0 % )

Sharpe = Treynor =
Fund Rp σp β
(Rp−Rf)/σ (Rp−Rf)/β

Growth 24.50% 3.35% 3.50 5.64 5.40

Diversified 13.25% 1.05% 1.01 7.29 7.57

Long-only 15.75% 2.15% 1.82 4.72 5.58

Long-short 19.30% 2.26% 1.95 6.06 7.03

Directional 14.65% 1.96% 1.73 4.62 5.23

Diversified fund wins on both Sharpe (7.29) and

Treynor (7.57) — best risk-adjusted return

Note: Growth fund has highest absolute return (24.5%) but mediocre Sharpe
(5.64). Long-short fund has lower return (19.3%) but much better Sharpe (6.06) —
shows importance of risk adjustment.

QUICK REFERENCE

All Key Formulas — One Table

METRIC FORMULA MEANING

CAGR (End / Begin)^(1/n) − 1 Annualised compound growth rate

Standard ̄ )² / n]
√[Σ(Ri − R Historical volatility of returns
Deviation
(σ)

Skewness =SKEW(range) in Excel 0=symmetric; +ve = right tail; −ve =

left tail (risky)

Kurtosis =KURT(range) in Excel Normal=3; >3 (leptokurtic) = fatter

tails, riskier

Max (Trough − Peak) / Peak Worst peak-to-trough AUM decline;

Drawdown always negative %
(MDD)

IRR NPV = 0: PV(inflows) = Time-weighted annualised return

PV(outflows); =XIRR accounting for cash flow timing

DPI Total Distributions / Realisation multiple — how much

Capital Contributed paid back

RVPI Unrealised AUM / Unrealised multiple — remaining

Capital Contributed value

TVPI DPI + RVPI Total value multiple = (Distributions

+ Unrealised) / PIC

MOIC (Realised + Unrealised) = TVPI when all capital is called

/ Invested Capital

KS-PME FV(Distributions + NAV) >1 = AIF outperformed market

/ FV(Capital Calls)

Direct IRR of market-adjusted Alpha as % return above market IRR

Alpha net cash flows

Sharpe (Rp − Rf) / σp Excess return per unit total risk

Ratio

Treynor (Rp − Rf) / β Excess return per unit systematic

 Ratio risk

PRACTICE

Practice Questions — 20 MCQs

Heavy numerical focus — use scrap paper for calculations. −0.25 per wrong
answer.

QUESTION 1 OF 20

A fund's NAV per unit rises from ₹1,000 to ₹1,265.99 over 2 years.
The CAGR return is approximately:

A 12.52%

B 12.85%

C 13.00%

D 14.02%

QUESTION 2 OF 20

Which return is ALWAYS the highest for a given AIF?

 A Net Return Post-Incentives

B Net Return Pre-Incentives

C Gross Return (Pre-expense)

D Post-Tax Net Return

QUESTION 3 OF 20

GST on management fees and professional service fees for AIFs is

currently:

A 5%

B 12%

C 18%

D 28%

QUESTION 4 OF 20

Fund A has a Standard Deviation of 2.06% and Fund B has 8.44%,

with Fund B having a higher mean. A prudent investor should:
 A Always choose Fund B for higher mean return

B Always choose Fund A for lower risk

Choose Fund B only if the extra risk is commensurate with the extra
C
return and investor has high risk appetite

D Cannot decide without Sharpe ratios

QUESTION 5 OF 20

A distribution that is 'positively skewed' is characterised by:

A Mean < Mode, long left tail

B Mean > Mode, long right tail (positive outliers)

C Mean = Mode = Median (perfectly symmetric)

D No outliers in either direction

QUESTION 6 OF 20

Fund B has a Kurtosis (Excel KURT function) of 5.034. This means:

A Fund B has a kurtosis below 3 — platykurtic

Fund B has actual kurtosis of 5.034, which is above 3 — leptokurtic

B
— indicating fatter tails and higher risk

C Fund B is perfectly normal distributed

D Fund B has negative excess kurtosis

QUESTION 7 OF 20

Maximum Drawdown (MDD) is calculated as:

A (Peak Value − Trough Value) / Peak Value

B (Trough Value − Peak Value) / Peak Value

C (Peak Value − Trough Value) / Initial Investment

D (Trough Value / Peak Value) × 100

QUESTION 8 OF 20

A fund's AUM peaks at ₹850 crore and troughs to ₹680 crore. The
Maximum Drawdown is:

A −20%

B −17.5%

C −25%

D −12.5%

QUESTION 9 OF 20

Gross IRR is calculated using cash flows at:

 A Investor level — after all fees and taxes

Fund level — before management fees, incentive fees, expenses

B
and taxes

C The hurdle rate as the discount rate

D The market index return as the discount rate

QUESTION 10 OF 20

Fund ABC raises ₹50 crore. After 5 years, the Gross NAV is ₹115 crore
with no interim cash flows. The Gross IRR is:

A 15.0%

B 18.13%

C 16.5%

D 20.0%

QUESTION 11 OF 20

In the J-Curve, during the 'vintage years' (early years) of a Cat I/II AIF,
the fund's IRR is typically:
 A Very high — early entry at low valuations

B Zero — no gains or losses

C Negative — capital being drawn down, fees charged, no exits yet

D Equal to the hurdle rate

QUESTION 12 OF 20

DPI (Distributed to Paid-in Capital) measures:

The total value of unrealised investments as a multiple of capital

A
invested

The amount that has actually been distributed to investors as a

B
multiple of capital invested

C The total fund return including both realised and unrealised gains

D The manager's incentive fee as a percentage of distributions

QUESTION 13 OF 20

If a fund has DPI = 0.40 and RVPI = 1.10, its TVPI is:

A 0.70

B 1.10

C 1.50

D 2.05
QUESTION 14 OF 20

RVPI = 0 and DPI = TVPI occurs when:

A The fund is fully committed but no exits made

B The fund is in its vintage years with maximum unrealised value

C All investments have been exited and fully distributed to investors

D The high-water mark equals the hurdle rate

QUESTION 15 OF 20

KS-PME > 1 for a Category I AIF means:

A The fund manager charged excessive fees

B The AIF underperformed the public market index

C The AIF outperformed the public market index

D The fund is overvalued

QUESTION 16 OF 20

Direct Alpha differs from KS-PME because:

 A Direct Alpha uses a different benchmark than KS-PME

Direct Alpha measures the fund's alpha directly as a percentage

B
return above the market IRR

C Direct Alpha only applies to Category III AIFs

D Direct Alpha ignores unrealised NAV

QUESTION 17 OF 20

Sharpe Ratio uses which risk measure in its denominator?

A Beta (systematic risk only)

B Standard deviation (total risk)

C Maximum drawdown

D VaR

QUESTION 18 OF 20

For comparing well-diversified portfolios, which ratio is preferred and

why?
 Sharpe Ratio — because it uses total risk which is more
A
comprehensive

Treynor Ratio — because for well-diversified portfolios, only

B
systematic risk remains; unsystematic risk is eliminated

C Sharpe Ratio — because it gives the same result for all portfolios

D Neither — only MDD should be used for diversified portfolios

QUESTION 19 OF 20

'95% one-month VaR of ₹1 crore' means:

A The fund will definitely lose ₹1 crore in the next month

There is a 5% chance the fund will lose MORE than ₹1 crore in the
B
next month

C The fund's maximum ever loss is ₹1 crore

D The fund needs to maintain ₹1 crore as cash reserve

QUESTION 20 OF 20

A fund's Sharpe Ratio is 6.06 and Treynor Ratio is 7.03 (Rf = 5.60%).
These ratios are NOT identical, which suggests:
 A The fund is fully diversified and all risk is systematic

The fund has unsystematic risk that has not been diversified away
B
— it is not a fully diversified portfolio

C The fund has no market risk

The fund manager has outperformed the market by exactly 6.06%

D
per unit of risk

Check Answers Reset