Apples-to-Apples: Assessing Evergreen Hedge Funds vs. Closed-End Private Funds

Allocators routinely compare hedge fund track records against private fund IRRs. That’s a category error. Evergreen vehicles report time-weighted returns (TWR); closed-end programs are cash-flow engines best judged by money-weighted return (MWR/IRR), TVPI/DPI, and PME/Direct Alpha versus liquid benchmarks. Mix these up and you reward reporting optics—credit lines, appraisal smoothing, pacing—rather than skill and portfolio value.

This article provides a clean, allocator-grade method to normalize and assess metrics, remove optical distortions, and decide between evergreen hedge funds and closed-end private vehicles on a like-for-like, risk-adjusted basis.

Start with the right yardsticks

The problem: allocators should match the measure to the structure, then build a bridge when you must compare.

Evergreen funds (hedge funds, open-end private credit) take flows at the investor’s discretion. The manager shouldn’t be penalized or flattered by timing they don’t control, so TWR (net) is the correct measure. Closed-end funds (private credit/PE) control cash timing via capital calls and distributions. MWR/IRR (net), plus TVPI/DPI, captures the economics of that design.

When you need a common language, translate closed-end cash flows into a public-market-equivalent frame:

• KS-PME (Kaplan–Schoar): compares capital invested in a public index with the same cash-flow pattern as the private fund to produce a ratio (>1 = outperformance). Foundational reference.

• PME+ / mPME: PME+ fixes the “negative NAV” problem in early PME implementations by scaling distributions; useful when the private fund strongly outperforms its public proxy. mPME is an alternative that adjusts public-side distributions by weights to keep the comparison economically coherent.

• Direct Alpha: converts private cash flows into a public-excess IRR (“alpha”) that is additive and comparable across funds.

Allocator rule: Report hedge funds as TWR (net). Report drawdown funds as IRR/TVPI/DPI (net). Use PME or Direct Alpha when you must compare across structures.

Clean up the optics before you compare

Three adjustments avoid paying for engineering instead of alpha.

Subscription lines inflate IRR timing.
Facilities that fund early deals and delay capital calls pull IRRs forward without creating value. Demand with- and without-line IRR, show facility size and average days outstanding, and reconcile to TVPI/DPI. Time-shifting isn’t alpha.

A notional example illustrates effects of funding facilities

Source: ILPA

Appraisal smoothing understates risk.
Illiquid NAVs move slowly and exhibit serial correlation in returns. Serial correlation understates reported volatility and overstates Sharpe, then collapses in stress. Treat “low vol, high Sharpe” in appraisal-based series with caution; if possible, unsmooth or at least haircut the optics for decision purposes.

Fee and expense normalization matters.
Compare net performance on a consistent fee base: pass-throughs and expense caps for hedge funds; management fees, carry, and fee basis (drawn vs committed) for private funds. Align everything to investor-level net.

Allocator rule: Don’t rank vehicles until IRR is de-lined, NAVs are de-smoothed (or caveated), and all series are net on a comparable basis.

Evergreen private credit vs. closed-end private credit

Open-end private credit vehicles (evergreen) aggregate vintages, reinvest coupons, and offer periodic subscriptions/redemptions with gates. The format has scaled rapidly—industry tracking points to ~$350bn AUM across ~520 evergreen funds by late 2024—because it reduces pacing risk and smooths the cash-flow profile for allocators.

Credit Dominates The World of Private Evergreen Vehicles

Source: Preqin

Evergreen offers liquidity optics that can clash with asset liquidity in stress; independent coverage warns about redemption pressure and liquidity-mismatch risk if investor flows turn. Bake this into your sizing and gate expectations.

How to compare to closed-end funds:

• Return metric: Evergreen = TWR (net); Closed-end = IRR/TVPI/DPI (net) + PME/Direct Alpha vs liquid credit proxies (e.g., HY, leveraged loans).

• Liquidity budget: Evergreen can be a liquidity buffer within alternatives; closed-end funds may target a higher illiquidity premium but with J-curve and pacing risk.

• Cash-flow volatility: Evergreen reduces vintage dispersion and eases cash-flow management; closed-end programs require commitment pacing and can deliver lumpier DPI.

Decision lens: Choose the structure that maximizes excess over cash per unit of unsmoothed risk, subject to a hard liquidity budget and documented gate/notice tolerances.

The Disconnect Between IRRs and TWRs for a Private Investment Portfolio

Source: Cambridge Associates

Equity long/short vs. private equity

Both target idiosyncratic equity value; one is mark-to-market and resizeable, the other is appraised and locked.

Equity L/S (evergreen).
Judge by net TWR, factor-neutral alpha, crisis beta, drawdown control, and capacity discipline. Watch for crowding and factor creep; if equity beta explains the P&L, you’re paying hedge-fund fees for public equity.

Private equity (closed-end).
Judge by IRR, TVPI/DPI trajectory, and PME/Direct Alpha versus a public equity proxy. Adjust for subscription lines and appraisal smoothing. Vintage dispersion is real; compare to proper cohorts, not to a generic equity index alone.

Allocator rule: If the private equity program’s PME/Direct Alpha is not convincingly positive after line-of-credit and smoothing adjustments, an L/S sleeve may deliver the same risk driver—idiosyncratic equity alpha—with better liquidity and cleaner measurement.

Portfolio decision

• Score each candidate on: (i) excess over cash, (ii) PME/Direct Alpha vs public proxy, (iii) unsmoothed drawdown impact, (iv) liquidity cost (lockups, gates), and (v) operational load (pacing, monitoring).

• Select the mix that improves portfolio Sharpe and max drawdown vs your reference—not just headline returns. (This is consistent with GIPS’ spirit of comparability and with institutional best practice.)

A simple allocator workflow - so decisions are comparable and repeatable

Collect the right inputs
Hedge funds/evergreen: monthly net TWR, factor exposures, fee/pass-through schedule, gates/notice, flow history.

Closed-end: full cash-flow ledger, IRR/TVPI/DPI, with- and without-line IRR, valuation policy, facility terms/usage.

Normalize

1. Compute PME/PME+/mPME or Direct Alpha to place private funds on a public-comparable scale.

2. De-line IRR; reconcile to TVPI/DPI.

3. De-smooth risk (or haircut Sharpe/correlation) where serial correlation is evident.

Decide at the portfolio level
Score candidates on: excess over cash, PME/Direct Alpha vs the right proxy, unsmoothed drawdown impact, liquidity cost (lockups, gates), and operational load (pacing, monitoring). Fund the mix that raises portfolio Sharpe and reduces max drawdown versus your reference portfolio—not the one with the prettiest standalone headline.

Conclusion

Stop comparing apples to oranges. Evergreen hedge funds and closed-end private funds are engineered for different jobs and must be measured accordingly.

Use TWR for evergreen; IRR/TVPI/DPI for drawdown; bridge with PME/Direct Alpha when you must compare. Strip out credit-line timing, appraisal smoothing, and fee basis inconsistencies before ranking anything.

Make the decision at the total-portfolio level—excess over cash, improvement versus your reference mix, and liquidity costs explicitly priced.